If you are a parent,  or have seen Arnold Schwarzenegger’s ‘Jingle All the Way’, you will find that during the holiday season, most of the popular toys are in short supply. This can make it difficult for you to please your little one on Christmas. While most of us wont go to the lengths Schwarzenegger went in that movie, we are, at most of the times, willing to pay more for that toy to see the smile on our kid’s face.

But come January and the stores drop the prices of that same toy to sell off the remaining stocks as early as possible. So why do we – the consumers and the stores – the producers, behave in this way? The answer lies in perhaps one of the most fundamental concepts of economics called ‘supply and demand’ which is the backbone of market economy.

In a market, supply and demand is the economic model that determines the price. According to law of supply and demand, in a competitive market, the unit price for any particular good will differ till it settles on a point where the demand in quantity by the consumer at current price is  equal to the quantity that is supplied by the producer, which in turn will result in an economic equilibrium of quantity and price.

The are two main components of supply and demand, viz. the law of demand and the law of supply and since supply and demand form such an integral part of our economics, it is important to understand them to analyze decisions about quantity and pricing.

The Law of Demand
In the economic terms, demand depicts as to how much quantity of a product the consumers are willing to buy – at different prices, during a certain period of time. The law states that if all the other factors remain equal,  the higher the price of a product, the less the consumers will demand the product/good. In simpler terms, the higher the price of a product, the lower its demand in quantity will be. The quantity of a good that consumer buys at a higher price is less because as the the price of a good goes up, the opportunity cost of buying that good goes up as well. The converse, that when the price falls, demand increases, is also true.

The Law of Supply
Where the law of demand explains the consumer side of buying decisions, the law of supply relates to the profit making desire of the producer. Unlike the law of demand, the supply relationship states that the higher the price of a good, the higher is its quantity supplied at a given time period. The producers do so because at a low price only producers who are efficient can make a profit, whereas, at a high price, profit can be made by even high cost producers. Hence, they are simply driven by the motive to generate more or increase revenues.

Demand and Supply Curve
If the outcomes according to the law of demand and the law of supply are plotted on a graph, they are represented by curves. The demand curve illustrates the negative relation between the price and quantity demanded whereas the supply curve shows a positive relationship.

So I think now it is much clear as to why we the consumers and the producers behave this way at times and especially during the holiday shopping season.