The Law of Supply & Demand

The Idea

Contributed by @philhagspiel |  Edited and curated by @philhagspiel

→ Want to contribute an idea and see it posted on MindVault? Click here.

Prices of most goods and services are determined by mass behavior and the interplay of who wants something and who has it.

icon

Fundamentals

icon

Finding Truth

icon

Mental Models

image

While our intuition about what a physical good like a phone, house or sandwich should cost is tied to what we believe is a fair price given our personal preferences, in reality, prices are determined by the masses and their behavior.

Generally, the more demand there is for something, the more expensive that thing becomes. This effect is particularly strong if the supply of that thing is limited.

  • The more people want to buy property in the inner city or at the beach, the more prices will go up — especially because the amount of such property available is limited.
  • → The demand for beachfront houses meets limited beachfront space and supply of these houses.

  • The more people want to eat at the airport, the more expensive airport food will get — especially because there is a very limited number of food stalls at each terminal.
  • → The demand for food at the airport meets limited mobility (closed terminals) and a restricted supply of restaurants on small space.

  • The more people want to see entertaining football matches, the more expensive it will become to sign and pay for superstar players — especially since there are only very few people who can play football at the elite level.
  • → The demand for professional football meets a limited number of players with adequate skills.

  • The more companies need tech-savvy engineers, the more salaries for programmers will go up — especially because there are only so many people who can work with computer code well enough.
  • → The demand for highly skilled workers meets a limited supply of well enough educated individuals.

The main mechanic behind prices adjusting to the interplay of supply and demand is that the higher prices become, the less people (or companies) are willing to pay for something (a house, food at the airport, salaries of football players and engineers, etc.).

Prices tend to raise to the point where all that's available will be sold even if this means that many others couldn't or didn't want to buy at that price.

“The price of ability does not depend on merit but on supply and demand.”

— George Bernard Shaw

Explore

➞ For an extremely insightful 12 min. explanation of how prices emerge from the interaction between buyers and sellers, watch this Primer animated video on YouTube.

➞ This CrashCourse video gives a great introduction to the basics of supply, demand and price development.

➞ For the basics of supply and demand and how they influence markets, read this Wikipedia article.

➞ Check out this blog post for a few illuminating real life examples of supply and demand at play.

Resources

If this idea resonates with you, some of these resources might add value to your life.

LinkNAMEFormatAuthor
Predictably Irrational
Book
Dan Ariely
Thinking Fast And Slow
Book
Daniel Kahnemann
Factfulness
Book
Hans Rosling
The Sovereign Individual
Book
James Dale Davidson
The Sovereign Individual
Book
James Dale Davidson & Lord William Rees-Mogg
VSI: Thinking & Reasoning
Book
Jonathan Evans
Antifragility
Book
Nassim Taleb
Skin In The Game
Book
Nassim Taleb
Fooled By Randomness
Book
Nassim Taleb
Managing Oneself
Book
Peter F. Drucker
Principles
Book
Ray Dalio
59 Seconds - Think A Little Change A Lot
Book
Richard Wiseman
Influence - The Psychology Of Persuasion
Book
Robert B. Cialdini
The Great Mental Models (vol. 2)
Book
Shane Parrish
The Great Mental Models (vol. 1)
Book
Shane Parrish
The Infinite Game
Book
Simon Sinek
Start With Why
Book
Simon Sinek
The 7 Habits Of Highly Effective People
Book
Stephen R. Covey
Enlightenment Now
Book
Steven Pinker
21 Lessons For The 21st Century
Book
Yuval Noah Harari
Venture Hacks
Blog
Naval Ravikant
Paul Graham
Blog
Paul Graham
Farnam Street
Blog
Shane Parrish
Lesswrong
Blog
Edge.org
Blog
Untools.co
Blog
The Systems Thinker
Blog
a16z Future
Blog
Modern Wisdom
Podcast
Christ Williamson
You Are Not So Smart
Podcast
David McRaney
The Portal
Podcast
Eric Weinstein
Lex Fridman Podcast
Podcast
Lex Fridman
Masters of Scale
Podcast
Reid Hoffman
The Prof G Show
Podcast
Scott Galloway
The Knowledge Project
Podcast
Shane Parrish
Philosophize This!
Podcast
Stephen West
The Tim Ferriss Show
Podcast
Tim Ferriss
Conversations With Tyler
Podcast
Tyler Cowen
Philosophy For Our Times
Podcast
Hidden Brain
Podcast
HBR Ideacast
Podcast
a16z
Podcast
Kurzgesagt
YouTube Channel
TED-ed
YouTube Channel
Crash Course: Statistics
YouTube Channel
3Blue1Brown
YouTube Channel
Quanta Magazine
YouTube Channel
Primer
YouTube Channel
Veritasium
YouTube Channel
Talks at Google
YouTube Channel
Vsauce
YouTube Channel
Brilliant.org
Courses
Principles
Instagram