Use the ‘Law of Supply and Demand’ to Save Thousands

This simple law of economics can fatten your bank account. See how you can use the law of supply and demand to save thousands.

Tthe basic economic law of supply and demand could save you thousands of dollars, yet many people feel that they can’t understand it. But it is easy enough for anyone to understand.

Here is what you need to know about supply and demand to keep more of your hard-earned money in your pocket. 

How Economics Affects Our Daily Lives

Let’s see how economics affects our daily lives. We’ll begin with our jobs.

The Law of Supply and Demand and Job/Career Choices

Junior is about to head off to college and doesn’t know which major to pick. Naturally, he’ll try to find something that he likes. But it’s also important to learn a skill that will help him find employment after he graduates.

The first question he’ll need to ask is whether there will be demand in five, ten and twenty years for the skills that he’ll learn. For instance, technology has decreased the demand for bookkeepers. Less demand means a less secure future as a bookkeeper.

That doesn’t mean that Junior should avoid every field that has a small need for people. It’s possible that no one is entering a specific field. In that case, he might do fine. The trick is to find a career where the demand for employees is greater than the number of trained people available.

The benefits of careful career selection will follow Junior for years. Take the time that he gets a puny raise. If his skills are in demand, he can shop around for a new, higher-paying employer. But, if there’s little demand for his talents, Junior will be left without any real options.

• The Best Adult Education Resources
• How To Position Yourself for a Salary Increase

Auctions: A Great Example of the Power of Supply and Demand

Next, let’s look at one of the best illustrations of supply and demand at work, namely auctions. Whether it’s an old-fashioned estate auction or one on the internet, the same forces are at work.

We all know the basic auction game. You put something up for sale, and it goes to the highest bidder. The more bidders that are interested (more demand), the higher the price. If, on the other hand, two or more similar items are offered (more supply), then prices will be lower. Internet auctions are popular with sellers because they attract more buyers.

The Law of Supply and Demand and Gas Prices

A run-up in gasoline prices is sometimes a learning experience on the law of supply and demand. OPEC controls much of the world’s oil supplies. If OPEC decides to cut production, it sets up a situation where the demand for oil stays the same, but the supply decreases. The result? High crude oil prices.

But, there’s a second lesson on supply and demand to learn from gas prices. It’s something called ‘elasticity’. Think of a rubber band. It stretches because it’s elastic. Items where the price affects the amount of demand are considered to have ‘elastic’ demand.

Economists recognize that demand for some items will decrease if the price goes up. Take our gas example. When gas prices go up, you may decide to join a carpool. That’s elasticity in action. But there are some errands that you can’t avoid, so your SUV is still on the road a certain minimum number of miles each week. That’s inelastic demand.

Meanwhile, back to our friends at OPEC. They may hold oil prices artificially high while we cut back on our gas usage. But, generally, people aren’t trading their bigger vehicles for more fuel-efficient ones. Yet. So before people get concerned enough to trade for a smaller car, OPEC decides to increase production a bit. That increases supply and reduces prices. Their hope is that slightly lower prices will keep us from buying a fuel-efficient car, which would reduce demand for years to come.

Using the Law of Supply and Demand to Your Advantage

So, how do you use the law of supply and demand to your advantage? You look for mismatches that favor your side. If you’re a buyer, you want to be able to make your purchase when there are more sellers than buyers. Suppose you wanted to buy some winter clothes. You’ll get a better buy shopping off-season. (See A Calendar for Smart Seasonal Shoppers.)

Or maybe you’re looking for a new car. Fall is the time to shop. Once vacation season is over, there are fewer people car shopping. That means less demand. Dealers have brand new models and last year’s leftovers still on the lot. That’s more supply. Who’s more likely to come out ahead? The buyer should have an easier time. (See Bargaining for the Best Deal on a New Car.)

Let’s move to the seller’s side for an example. Suppose you want to sell your three-bedroom home. The most likely buyer will have children. They would prefer to move when the kids are between school years. So most of them shop in the summer. You guessed it! The demand for your home will be greatest in the summer, and that’s when you’ll get the best price.

The Demand for Money

There’s one final area of supply and demand for us to examine. That’s the demand for money itself. Yes, there’s a supply of money that’s controlled by the Federal Reserve Board. And all of us, both consumers and businesses, create a demand for that money.

The ‘price’ of money is the cost of borrowing it. The greater the demand for money, the higher the interest rate. If there’s not much demand for money, you’ll see lower interest rates.

How Financing a Car Affects the Demand for Money

So, how do we fit into the equation? We have the ability to affect the demand for money. Let’s suppose that you fall in love with a red convertible. The dealer is willing to finance it, but at current interest rates, the payments are too high. In effect, you’ve just lowered the demand for money by the cost of that car. On the other hand, if you decided to buy it, you’d be increasing the demand for money.

How Your Demand for Money Affects Your Credit Card Interest Rate

Try another example. Your credit card balance keeps inching up each month. The bank has just increased the interest rate that they charge you. What’s happened? They’ve figured out that your demand for money is increasing.

If you have available credit on another card, you can transfer your balance. That’s possible because there’s another supplier anxious for your business. But, if you can’t find another source for the money, you’ll be stuck with the higher rate (i.e., higher price).

If you keep your eyes open, you’ll find lots of areas where supply and demand effects your financial life. By paying attention, you’ll see opportunities to save or make money.

• The Rule of 72 (or How To Easily Double Your Debt)
• How Macroeconomics Can Help You Reach Your Financial Goals
• Economics and Your Personal Finances
• Is the Sunk Cost Fallacy Sinking Your Finances?
• Using Opportunity Costs To Live a Happier Life

Reviewed September 2023

About the Author

Gary Foreman is the former owner and editor of The Dollar Stretcher. He's the author of How to Conquer Debt No Matter How Much You Have and has been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, Credit.com and CreditCards.com.