Supply and Demand form the foundation of economics.
To understand the principle, we need to understand that the demand for the asset increases, or as its supply decreases, the asset price will rise and vice versa.
The following is an example that illustrates this principle.
Example from our daily life
Let’s say a farmer has 5 regular customers.
Each day, a chickens lay 10 eggs.
One day, the chickens lay only 5 eggs, although the same number of customers wants to buy eggs.
There aren’t enough eggs for everyone, making each client willing to pay more for each egg, resulting in increase in the price egg.
In another word, supply decreased, less eggs, but the demand did not decrease, resulting in an increase of the value of the eggs.
This can also go the other way around.
Let’s say the chickens decided to lay 15 eggs. Now the supply has increased, but the demand remains the same.
In order to sell all the eggs, the seller must lower the price of the eggs.
In another word, the supply increased, causing the decrease in the value of the eggs.
Demand is also subject to change.
For example, one day the chickens laid as usual 10 eggs, but fewer customers come to buy them.
The seller may find them left at the end of the day. With unsold eggs, requiring them to lower the price.
In another word, the supply remains the same, but the demand decreases. So the value of the eggs also decreases.
Supply and Demand in financial market
The following is an example from global trading market.
If a poor economic statistics announced in Britain, many traders will want to sell the British pound.
In another word, the supply of pounds will increase, resulting in the decrease in the currency’s value. The decrease in the value of British Pound.
Another example, if a crisis in an oil rich Arab counties announce, the price of oil will increase, due to fear of the supply of oil will decrease, as results of a sensitive developments in the region.