How Demand & Supply Affect Economic Growth

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Consumers must demand goods and services in the economy.
Consumers must demand goods and services in the economy. (Image: Siri Stafford/Lifesize/Getty Images)

The relationship of supply and demand to the economy involves understanding basic economics. The economy functions as an infinite tug-of-war between the forces of supply and demand. Customers must have a need for products or services that are available in the economy. If customer demand decreases, then suppliers will typically reduce their production, which slows down the economy.

Consumer Buying Power

One way to study economic growth is to look at a consumer's buying power. In an economy with high inflation, a consumer will have less buying power. The cost of each product or service will be high in relation to the consumer's financial resources. A consumer has more buying power when the costs of products are relatively low compared to his financial resources.

Food Commodities and Inflation Example

Food prices offer a good example. If the demand for food commodities is really high, but the availability of food commodities is lower than normal, consumer prices for food will sharply rise. Paying more for food will affect a consumer's buying power. She will have to spend more for food, giving her less money to spend on other products and services. Therefore, the supply and demand of food commodities would have spillover affects on other parts of the consumer economy.

Job Growth

Economic growth arises in part from business creation. Businesses that offer consumer goods and services create jobs for consumers. When people have employment, they have money to turn around and spend in the economy. So if there is a demand for many types of products and services in a healthy economy, businesses will grow and add jobs. In this ongoing cycle, consumers spend and businesses grow to meet their increased demands, or needs.

Equilibrium Price

The best market situation for a product is equilibrium price, where the patterns of supply and demand intersect. In this situation, consumer demand for a product closely balances with available supply. Here the price of a product remains relatively stable, creating a predictable market around which businesses can plan their activities. Economic growth can occur in an economy with many instances of equilibrium price if there are certain parts of the economy where supply must catch up to demand.

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