What does demand supply mean? Understanding the basics of pricing for investors

Demand and supply refer to the buying and selling interests that occur in the market. They are among the most fundamental concepts in economics and play a crucial role in investors’ decision-making. Understanding this concept not only helps predict stock price movements more accurately but also serves as a key to analyzing financial markets.

Demand and Supply as the Basis of Price Movements

To deeply understand demand and supply, we need to know how each side operates and how they are interconnected.

Demand is the desire to buy goods or services at various price levels. When plotted on a graph, it shows an inverse relationship: high price → lower quantity demanded; low price → higher quantity demanded. This relationship occurs due to two factors: income effects (when prices fall, buyers have more remaining money) and substitution effects (when prices fall, the good appears more valuable compared to alternatives).

Supply is the desire to sell goods or services at various price levels, showing a direct relationship: high price → higher quantity supplied; low price → lower quantity supplied, as sellers aim to maximize profits.

Understanding Factors Affecting Price

Factors influencing demand are diverse, not limited to price alone. They include buyers’ income, consumer preferences, the number of buyers, future price expectations, seasonal factors, and overall economic conditions.

Factors affecting supply are similarly not solely dependent on price. They also include production costs, prices of substitute goods, the number of competitors, technology, and future price expectations.

Applying Demand and Supply Principles to Investment Timing

In the stock market, demand and supply are not just about the stocks themselves but about the demand for investing in those companies. Factors such as expected earnings, company growth, or economic changes influence demand or supply.

Technical analysts use various tools to indicate demand and supply, such as:

1. Candlestick Analysis: Green candles (closing price > opening price) indicate buyers are winning, while red candles (closing price < opening price) show sellers are winning. Doji candles (opening ≈ closing) suggest indecision between buyers and sellers.

2. Market Trend Analysis: If prices make new highs consistently, demand is winning; if prices make new lows, supply is prevailing.

3. Support and Resistance Levels: Support is where buyers are waiting; resistance is where sellers are waiting.

Price Equilibrium: The Market’s Turning Point

The actual market price occurs at equilibrium, where demand and supply curves intersect. At this point, the quantity buyers want matches the quantity sellers offer, stabilizing the price.

When prices are above equilibrium, excess supply occurs, pushing prices down. When prices are below equilibrium, excess demand occurs, pushing prices up. Equilibrium is the price likely to revert to over time.

Understanding demand and supply is a vital tool for investors because it helps us forecast price changes based on sound principles and make more effective investment decisions.