Economics 101: Supply and Demand with Examples of Cryptocurrencies
The basic concept of economics with examples including cryptocurrencies.
If you’ve ever encountered economics courses, the first thing being taught is the law of supply and demand. Now, we’ll discuss the law of supply and demand with examples.
What is the law of supply and demand?
There are two ways to study this law: the law of supply and the law of demand interacts to determine market prices and the volume of all the goods and services in the market.
The law of supply and demand is required to understand the whole concept of economics and to study cryptocurrency markets.
The supply side of the law
In economics, when the supply increases, prices get decreased and users tend to demand more of a good as the increased supply reduces current market prices. When we look at the inverse scenario, when prices become lower, producers decrease supply to raise the prices of goods.
The demand side of the law
Consumer demand is one of the determinants that can drive the prices of goods. If consumers demand more goods, prices will increase. As a result, producers will produce more goods to derive more revenue. Demand for goods decreases when the prices increase.
When shortage occurs
When the prices decrease, consumers tend to demand more of a good. However, producers tend not to produce goods and services. As the supply got reduced to raise the prices to make a profit and consumers are demanding more goods, a shortage occurs in the short run. After shortage occurs, the market adjusts to the initial equilibrium.
When surplus occurs
When prices become higher, consumers demand fewer goods, and producers produce more to generate more profit. However, users don’t buy goods and surplus occurs. After surplus occurs, the market adjusts to the initial equilibrium.
What are the determinants of supply and demand?
Expectations
Expectations efficiently affect supply and demand. When suppliers think that the price of goods increases to supply more to generate another profit. On the other hand, when suppliers think that certain goods will increase, they supply more goods to a market.
Tastes
Tastes are one of the determinants for supply and demand because consumers tend to demand more of a certain good when they like someone. When producers found out a good that consumers really like, they produce more of this good to generate more profit.
Costs
Costs are one of the main determinants for supply and demand. Costs vary from technology, machinery, labor, and capital. Because the prices are directly related to costs, producers trying to cut every possible corner to supply more of a good under normal circumstances.
Supply and demand examples
Bitcoin Mining Rates
Bitcoin mining relies on the principles of supply and demand. When people want more cryptocurrencies, Bitcoin mining difficulty increases to cope with the demand. Even more, Bitcoin mining rewards also get halved every four years. When we look at these results, both the increasing demand and the decreasing supply over time increases the price of Bitcoin in the long run.
Dollar-Backed Stablecoin Minting
Various stablecoins minting is another example of the law of supply and demand. Because stablecoins are pegged to an asset, when stablecoin’s price increases, stablecoins reduce the value by supplying more into the market. When stablecoin prices are below the value of an underlying asset, the supply gets reduced to increase the price.
On the other hand, stablecoins are the main source of liquidity for cryptocurrency markets. When liquidity is required to bolster the market, dollar-backed stablecoins expand the supply to adapt to the increasing demand on liquidity. However, when the demand for liquidity decreases, stablecoins burn their supply to retain their value.
