Understanding the law of supply and demand (in crypto)

This is the ultimate law of economics. We cannot escape it. Before starting a business and releasing a product to the market, companies do extensive research to estimate demand. If there is no demand, there is no need to create supply. We always rely on this law of supply and demand.

It alone determines the creation and justification of numerous markets. In the world of cryptocurrencies, this law is also used regularly to justify/determine the price of a crypto.

We have prepared this article to explain the basics to you. Indeed, we are not going to push the concept by talking about Ricardo or Hayek. We will just explain what is important to know about this famous law.

What is the law of supply?

In economics, supply is a concept that describes the total quantity of goods, or stock, available to consumers. Supply depends on the quantity of goods available at a given price. Therefore, supply is closely linked to demand. This means that when the demand for goods increases, the supply also increases. Furthermore, supply also increases when the price rises, because manufacturers want to produce goods that help them maximize their profits.

What determines the Offer?

Supply is a concept that can be measured using numerous formulas and is determined by various factors. One of these extremely important factors is the price of a product, as it plays a crucial role in the supply process. We often observe that supply increases with rising prices. In addition to the main good, the prices of raw materials and labor also impact supply.

Mathematical formulas for supply show a relationship between supply and the factors that affect it, such as the price of the good. That said, market influences, government rules and inflation may be other factors that will affect supply.

The exception to the law of supply

The law of supply and demand states that when the cost of a good increases/decreases, the quantity of the good supplied decreases/increases respectively. You should know that these rules are not immutable. Here are some factors that are exceptions:

• The competition: Companies can reduce the prices of certain goods to remain relevant in market competition. Thus, they will attract buyers to their properties. This disqualifies the law of supply.

• Change of activity: When a business owner is considering a career change, there is a good chance that they will sell their inventory at a lower price. Thus, the new buyer has new stocks at much lower prices. This overrides the law of supply.

• Market control : In other words, a monopoly can lead a seller to control market supply despite rising prices. Anti-trust laws exist for a reason. This disrupts the entire law of supply and demand.

• Perishable goods: Some goods with imminent expiration dates may be sold at lower prices. Sellers prefer to sell cheaper than to sell nothing at all. They're right, it makes sense, right?

• Authoritarian restriction of quantities : Government regulations or rules set by policymakers may prohibit sellers from producing beyond a given quantity. They can also place restrictions on the prices of certain goods so that sellers do not sell the goods beyond specified prices.

• Artistic goods : Even if there is a price surge, artistic goods cannot be produced on demand. Therefore, these goods counteract the law of supply. Besides, genius is rare on earth and the supply is then by definition just as rare.

• Food and agricultural goods: Since it is a natural product, agricultural products cannot be supplied beyond a certain limit. The offer is always limited.

What is the law of demand?

Like supply, demand is an economic concept. The willingness and potential of consumers to purchase a specific quantity of a good or service at a specific time or over a period of time is called demand.

Factors Affecting Demand

• Consumer preferences between different goods. 
• The prices of other consumer goods that are substitutes or replacements. 
• Changes in conditions that influence consumer preferences, such as seasonal changes or marketing effects on particular products. 
• The increase or decrease in income.

Exceptions to the law of demand

It is important to know and remember that there are also exceptions to the law of demand. For example, the so-called "Giffen" and "Veblen" goods are the known exceptions in microeconomics. Economists believe that, although these are rare and difficult to prove events, there are indeed cases where the law of demand is invalidated.

Let's quickly recall the concept: According to the law of demand, quantity demanded increases when prices fall, indicating an inverse relationship between price and quantity.

• Giffen's goods : These are goods generally considered to be inferior goods. In fact, consumers are consuming more lower-quality goods despite rising prices. If the price of payment increases, people will still buy it because it is still bread; an essential staple for many households. This directly contradicts the law of demand and is therefore considered an exception.

• Veblen’s Property: Thorstein Veblen said that people perceive certain more expensive goods as having greater efficiency. A typical example of Veblen is the diamond. Because of its perceived value, people will buy diamonds even if prices keep rising. Veblen goods are synonymous with status and opulence and are much more visible in society than Giffen goods. Many luxury goods fall into this definition, whether it be luxury clothing or sports cars.

What is the law of supply and demand?

By definition, the law of supply and demand describes the association between sellers and buyers of a particular good. It is a theory that describes the relationship between the price of a particular good or product and people's willingness to buy or sell it. In general, people tend to offer more and ask for less when prices rise, while the opposite is true if prices fall.

As supply increases, the price tends to decrease due to continued demand. Theoretically, markets reach an equilibrium point where supply equals demand at a given price. This means there is neither excess supply nor shortage, ensuring beneficial utility for consumers and maximized profits for manufacturers.

The economic concept of supply and demand is also responsible for the impact on the prices of goods and services. The relationship between supply and demand eventually reaches equilibrium. This is what is called an equilibrium price according to market economic theory.

Understanding Price Elasticity 

A price increase generally leads to a decrease in demand, and an increase in demand generally leads to an increase in supply. It's all interconnected. That said, the supply of different products responds differently to demand, with demand for some products being less sensitive to price than others. Economists describe this sensitivity as the price elasticity of demand ; products whose pricing is sensitive to demand are said to be price elastic.

Inelastic pricing indicates little influence of price on demand. The law of demand still applies, but pricing is less strong and therefore has a smaller impact on supply.

The inelasticity of a product's price can be caused by the presence of more affordable alternatives on the market, or it can mean that the product is considered non-essential by consumers. This can happen with certain cryptocurrencies that lose their appeal, for example, within their communities. In such cases, a drastic price drop occurs.

An increase in prices will reduce demand if consumers are able to find substitutes, but will have less impact on demand when alternatives are not available. Health care services, for example, have few substitutes and demand remains strong even when prices rise.

So that's what you need to know about the law of supply and demand. To delve deeper, feel free to consult sources on Wikipedia (or elsewhere) and do your own research in the fascinating field of Economics.

By better understanding the law of supply and demand, you will also better understand the tokenomics of cryptocurrencies.

What is Tokenomics: the crypto economy for?