The demand and supply analysis is one of the main tool available to see how a market (the grouping of buyers and sellers for a specific good or service) behaves.
The demand curve is the equation (and the related graph) depicting the relationship between the price of a certain good or service, and the amount of it that consumers are willing and able to purchase at that given price.
Let’s use as an example the renting house market in Munich, Germany.
The picture shows that the demand for a flat costing 400€/month is 80.ooo flats and this demand goes down until 40.000 flats when the rent goes up to 800 €/month. Of course fewer people will be interested in the flats if they will be too expensive for them; they look for alternatives (a room instead of a flat, a town in the suburbs, etc.) or they buy less quantity (for example if the meat price grows, people eat less meat). Therefore the graph indicates also what’s the “current actual price” for a flat in Munich today.
In this case the curve is linear but very often they aren’t. But always the demand curve has a negative slope, i.e. the demanded quantity grows when the price decreases.
Let’s look to the seller side: the corresponding tool is the supply curve (in red).
It shows how many flats will be available for every price, at which the seller can covers its own costs: at 400€ / month the sellers can offer 40.000 flats, as soon as the prices increase, the sellers can afford to build or renew more flats, therefore the supply can increase to.
Using the combined demand and supply curves, it is possible to determine the equilibrium price. This is the combination price-quantity for which both consumers and producers are satisfied. For every other combination, one of the parties will be unsatisfied. Also, at the equilibrium price, there is no excess of supply nor demand.
For our example the equilibrium price is 600€/month. If the prices go up, the consumers will be unsatisfied and there will be flats remaining un-rented so that the agencies will be forced to decrease the prices; if the prices go down, the agencies will be unsatisfied