Supply and Demand Trading Supply and Demand is the heart of a market economy [Capitalism]. Since market economy is based on exchange of goods and services for a value, for it to function there has to be some goods and services on offer [supply] and people who are willing and able buy them [demand]. Supply and Demand in textbooks look as two separate things for study purposes but in reality they are strongly interconnected. One cannot exist without the other.

In an ideal open market, prices are defined by supply and demand, creating a base framework for allocating resources in the most efficient way possible. However, in reality this is not always the case. Monopolies and regulators in certain sectors or systems can define prices as they like regardless of buyers. Prices may also be manipulated by speculators unnaturally thus overriding basics laws of supply and demand.

As it can be seen on the above illustrations, suppliers will produce more when prices going up while buyers will increase their demand when prices are going down. A clear conflict of interest supposes to create a healthy and efficient market. That’s in theory, but in reality we know that there are situations when prices are going up but suppliers will not increase their output unless there are healthy competition. Or buyers will not increase their buying even if prices are going down when they don’t have a buying power.

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