Supply and demand
Ask a man on the street about economy and they will probably slip “supply and demand” as a catchphrase. Even the war on drugs is explained away by “supply and demand.” For example, the lay press or media (and thus a man on the street) might say that drug users are encouraging drug producers and drug gangs and subsequent murders and gang crime. Therefore a cannabis smoker is responsible for the death of some underprivileged family. I'm not going to go into it too much, but it is not that simple. Demand does not directly lead to supply. There might be hundreds of millions of people who want the cure for cancer, but it doesn't mean that it is in ready supply. Demand does not lead to supply. Quite equally, and obviously, supply does not lead to demand, although some lay people might imply this when they eloquently rabbit “supply and demand” when talking about economics.
How I see it is that demand or willingness to pay increases the price of a commodity because a party is willing to go through a transaction at a higher price. The more the person doing the demanding is willing to pay, the higher the price the supplier can offer. If the demand is great, but the demander is unwilling to pay more than $1 (lets say through a trade union) then the price will stay the same. This extends to insurance, shipping, etc. The fact that demand only affects price is very important. For example the demand for torrented movies and albums may be huge – but if the demanders are unwilling to pay anything (which is normally the case when people torrent intellectual property) then the price will not increase and the supply will not increase. In fact, in the case of the record industry mass pirating caused the price to reduce and for record labels to sign less musical acts in effect reducing supply.
If we look at the reverse angle, is supply going to affect demand? For instance, is having 1 million extra copies of a film going to increase demand or reduce it? The answer of course is that it depends entirely on the price. If the price that the supplier is willing to supply at is the same, then the demand will be the same. It is only when the supplier is willing to lower the price then demand will change. If the price is lowered enough, then the 'demand' may actually increase even as the supply increases.
The idea that 'its just supply and demand' is inherently wrong. It would be more accurate to state that supply, price and demand are the cornerstones of the market. Excluding knowledge of the price that the participants are willing to pay makes supply and demand an incomplete concept.
Where supply and demand are met at an equivalent price is sometimes termed 'fair value' (although again, I do not like this phrase because it implies other valuations). Whenever price stops then it can where supply has met demand at a certain value – this is the nature of a transaction and trading. If the price differs from supply to demand then the price will change.
So as traders I am looking for those occasions where supply and demand will differ significantly to cause a price movement that we can speculate on and make money - and this information is not exclusive to candlesticks, trendlines or support and resistance lines.
**caught up with cut and pasting now**
Ask a man on the street about economy and they will probably slip “supply and demand” as a catchphrase. Even the war on drugs is explained away by “supply and demand.” For example, the lay press or media (and thus a man on the street) might say that drug users are encouraging drug producers and drug gangs and subsequent murders and gang crime. Therefore a cannabis smoker is responsible for the death of some underprivileged family. I'm not going to go into it too much, but it is not that simple. Demand does not directly lead to supply. There might be hundreds of millions of people who want the cure for cancer, but it doesn't mean that it is in ready supply. Demand does not lead to supply. Quite equally, and obviously, supply does not lead to demand, although some lay people might imply this when they eloquently rabbit “supply and demand” when talking about economics.
How I see it is that demand or willingness to pay increases the price of a commodity because a party is willing to go through a transaction at a higher price. The more the person doing the demanding is willing to pay, the higher the price the supplier can offer. If the demand is great, but the demander is unwilling to pay more than $1 (lets say through a trade union) then the price will stay the same. This extends to insurance, shipping, etc. The fact that demand only affects price is very important. For example the demand for torrented movies and albums may be huge – but if the demanders are unwilling to pay anything (which is normally the case when people torrent intellectual property) then the price will not increase and the supply will not increase. In fact, in the case of the record industry mass pirating caused the price to reduce and for record labels to sign less musical acts in effect reducing supply.
If we look at the reverse angle, is supply going to affect demand? For instance, is having 1 million extra copies of a film going to increase demand or reduce it? The answer of course is that it depends entirely on the price. If the price that the supplier is willing to supply at is the same, then the demand will be the same. It is only when the supplier is willing to lower the price then demand will change. If the price is lowered enough, then the 'demand' may actually increase even as the supply increases.
The idea that 'its just supply and demand' is inherently wrong. It would be more accurate to state that supply, price and demand are the cornerstones of the market. Excluding knowledge of the price that the participants are willing to pay makes supply and demand an incomplete concept.
Where supply and demand are met at an equivalent price is sometimes termed 'fair value' (although again, I do not like this phrase because it implies other valuations). Whenever price stops then it can where supply has met demand at a certain value – this is the nature of a transaction and trading. If the price differs from supply to demand then the price will change.
So as traders I am looking for those occasions where supply and demand will differ significantly to cause a price movement that we can speculate on and make money - and this information is not exclusive to candlesticks, trendlines or support and resistance lines.
**caught up with cut and pasting now**