One of the most powerful forces in the economy, whose study is essential to analyze companies and businesses, is the law of supply and demand. Supply and demand are two of the main forces that control the basis of the economy and financial markets. They are always in constant interaction.
What is Supply?
Supply can be defined as the quantity of a good or service that producers are willing (and able) to offer, at each price level, in a given period. It is worth mentioning that the concept of offer is different from that of sale. After all, the offer happens when there is an intention to sell a good or service, whereas to sell is to actually do it. Thus, the offer shows us the producers' sales intentions.
What is Demand?
Demand can be defined as the quantity of a good or service that consumers are willing to buy (and would be able to do), at each price level, in a given period. It represents the maximum that consumers can consider, considering their income and the prices of goods on the market. The concept of demand, therefore, is different from the concept of purchase. Because "demand" means being willing to buy, while "buying" means making the purchase.
If we could define in a few words why a stock falls or rises on a given day, we could say that it was the law of supply and demand in action. However, as with any rule, there are exceptions.
Those exceptions are:
The first exception is Veblen's effect - ostentatious consumption, whose concept is used to describe spending on goods or services acquired mainly for the purpose of demonstrate wealth. Product has characteristics of exclusivity and scarcity. It is seen as a demonstration of power, wealth, status or class.
The second one is Giffen effect - those in which demand increases even as the price increases - and demand falls when the price decreases. In general, they are considered inferior goods: there are no close substitutes, or people buy less when their income increases.
It's very important to know which product, stock, crypto is aiming for to know how to be positioned.