Law of Supply and Demand: What It Is and How It Works

What Is the Law of Supply and Demand?

By Jeremy Bowman – Updated Apr 17, 2025 at 12:14 PM

Key Points

Supply and demand determine equilibrium prices; high demand or low supply raises prices.
Investing during low demand and high supply periods can lead to cost savings.
Supply-demand principles guide pricing in commodities, stocks, and event tickets.

Most people have heard of the law of supply and demand, but you might not know exactly what it means. Supply and demand are two of the most fundamental concepts in economics, and their interaction is key to determining the price of a product in a free market as well as to understanding the way markets work. Keep reading to learn more about the law of supply and demand and how it applies to everyday decisions.

Words Supply and Demand on a scale. — Image source: Getty Images

What is the law of supply and demand?

The law of supply and demand is an economic theory asserting that supply and demand will meet each other at a certain equilibrium price. At its most fundamental level, the theory states that if supply goes down or demand goes up, prices will rise. If supply goes up or demand goes down, prices will fall.

The relationship between supply, demand, and price is one of the most important in economics, and it informs business decisions and public policy.

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Supply and demand in the real world

One good example of supply and demand can be seen on ticket resale websites such as StubHub. Sellers set prices based on existing supply and demand, and they will adjust them based on how supply and demand change.

Unlike most products, event tickets have an expiration date. So prices tend to fall as the date of the event approaches because sellers want to make sure they sell their tickets. In this case, supply outstrips demand, lowering prices.

Another example is the price of commodities, which tend to go in cycles, depending on supply and demand. Egg prices spiked when avian flu spread and decimated the hen population; the prices of oil and natural gas are also cyclical, depending on global economic demand and available demand.

The laws of supply and demand are also on display in the stock market. Prices rise when investor demand exceeds supply and drop when demand falls and investors want a lower price to buy the stock.

If you’re preparing for the next bull market, understanding the law of supply and demand will help you take advantage of it.

About the Author

Jeremy Bowman has been a contributing Motley Fool stock market analyst, covering technology, consumer goods, and macroeconomic trends since 2011. Before The Motley Fool, Jeremy was a newspaper reporter, restaurant manager, and English teacher abroad. He holds a bachelor’s degree in English from Colorado College and a master’s degree in business administration from American University. One of his Motley Fool headlines was briefly featured on Late Night with Stephen Colbert.

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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple. The Motley Fool has a disclosure policy.