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Sumedh Prasad Joshi

4/12/20210 min read

Supply and demand can be considered as one of the most basic functional and paramount tools to determine or anticipate the price of any financial security. Demand is created by people who are willing and able to buy various quantities of stock at various possible prices. On the other hand, supply is created by people who are willing and able to sell various quantities of stock at various possible prices. Fig. 1 shows the relation between supply and demand. The interaction between these buyers and sellers decides the price and overall position of the security or the market trend.

Relationship between Supply and Demand

Law of Demand

This law establishes the inverse relationship between price and quantity demanded. This law states that, “ceteris paribus, as the price of stock increases, the quantity demanded will decrease and if the price of stock decreases, the quantity demanded will increase”. Quantity demanded is the quantity that buyers are willing and able to buy at a specific price at a specific point in time. As shown in Fig. 2, if an investor is willing and able to buy Rs. 10000 worth of Stock X which is trading at Rs. 500 per share, he will be able to acquire 20 shares. Now, if the price of this Stock X falls to Rs. 400 per share, according to the law of demand, the quantity demanded will increase to 25 shares. This shows that if the price of a security falls, buyers can acquire more shares to satisfy the amount that they were willing and able to purchase.