What is a supply and demand graph—and how to use one

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Share What is a supply and demand graph—and how to use one

Why do some products succeed in the market while others struggle to launch? Before starting a major product redesign to attract more customers, teams need to consider economic factors at play. The price of your product and others like it on the market may be affecting supply and demand—the amount of goods available and how much people want to buy.

A supply and demand graph packs all the information you need into a single chart. Use this handy tool to analyze economic factors with your team, so you can set prices wisely and stay ahead of market turns. With this guide, you can cover supply and demand graph basics—and build one easily using FigJam's online collaborative whiteboard. Topics include:

What is a supply and demand graph?
How to read a supply and demand chart—and how to tell a demand curve from a supply curve
How to use a supply and demand graph to navigate a competitive market
What to cover on your supply and demand chart
How to graph supply and demand with FigJam

What is a supply and demand graph?

A supply and demand graph charts the relationship between how much product you’re making (supply curve) versus how much your customers are buying (or are willing to buy) at different price points (demand curve). The goal is to take some of the guesswork out of pricing, so you don’t lose profits or customers by over- or under-charging.

How to read supply and demand graphs

A supply and demand graph shows price on the left-hand vertical axis (also called the y axis) and quantity along the horizontal axis (aka the x axis). On any supply and demand chart, there's a downward-sloping demand curve and an upward-sloping supply curve.

According to laws of supply and demand, demand usually decreases when the price increases—but lower prices usually decrease supply. This is because customers don’t want to pay too much, and producers don’t want to end up with unprofitable surplus goods. This is where the law of supply comes in: When the price rises, producers will be motivated to supply more goods.

When consumers are willing to pay what producers ask, supply and demand curves intersect. The point where supply and demand intersect is the equilibrium price—the sweet spot where there’s neither excess demand nor excess supply.

How to use a supply and demand graph in a competitive market

Say you lead a creative team for a sales automation company. Your team creates all the company’s design assets in-house, and your user analytics just revealed good news: Customers are engaging with your free educational videos, and your audience is growing fast.

Now you've got a challenge: the VP of Marketing is asking you to ramp up video production to keep up with consumer demand. To supply more videos, you’ll need help from an outside agency—but that might increase your cost of production.

Your VP doesn’t want to pay a higher price to produce free videos. Can’t you find a lower price than the market price agencies charge? Or maybe your audience would be willing to pay for videos? To show the costs and benefits to the company of hiring an agency, you need a supply and demand diagram.

First, track demand increases for your videos. Then look at market data: If you charged even $0.99 per video, how much might demand decrease? Plot that data along the demand curve of Figma's supply and demand graph template.

Next, plot your supply curve, showing the maximum number of videos you can supply at your current cost of production—and how much more you could supply with professional agency inputs. Now your VP has a clearer picture of the cost-benefit involved in using an agency—and sees the value your team brings to the company.

3 benefits of supply and demand graphs

Project managers, product engineers, and startup founders share a trade secret: they use supply and demand graphs to project, plan and communicate their next moves. Plot your own supply and demand chart so you can:

Find a higher price that makes your products profitable, without decreasing consumer demand—achieving elusive market equilibrium.
Respond to potential threats that could decrease consumer demand or lower price levels—such as consumer income changes or competitive market shifts.
Communicate complex market factors like economists do, whether you're pitching to investors or working with your team.

What to cover on your supply and demand graph

A supply and demand graph captures complex competitive market dynamics that affect pricing and profits. Here are three key factors to track on your chart that will help you understand and anticipate market shifts.

1. Supply and demand elasticity

Before changing the price of the good your company produces, you need to know: Will your new price point lose you customers, or cut into your profits so that you supply less? Your supply and demand graph can show you how sensitive, or elastic, consumer demand and supply are to price changes for your product.

According to The Strategic CFO, elasticity is “the relationship between increases and decreases in price and increases and decreases in supply and/or demand.” In a free market, here’s how elasticity works:

Price elasticity of demand is how much more or less your customers buy of your product when your price falls or rises. Demand is elastic when it goes up or down in response to price changes. The more significant the change, the more elastic demand is.
Price elasticity of supply is how sensitive suppliers are to price changes. The more supply goes up or down in response to price changes, the more elastic it is.

2. Supply and demand curve shifts

Sometimes, the whole demand or supply curve shifts, regardless of pricing. Cultural movements that make customers feel differently about buying your goods can trigger demand curve shifts. Maybe your product becomes a social media sensation, or the target of a boycott. Some demand curve shifts are global, like when an economic crisis lowers income levels, forcing consumers to seek out lower priced substitute goods.

When raw materials become scarce, that could cause supply curve shifts. On the flip side, technology advancements may lower the cost of production, flooding competitive markets with a greater quantity of goods and leading to excess supply. Tracking these changes on a supply and demand chart helps you recognize and stay ahead of market shifts, and find a new equilibrium.

3. Government impacts on supply and demand

Government can nudge the supply curve with subsidies, taxes, and price floors. For instance, subsidies encourage suppliers to produce more without price increases. This might shift the supply curve to the right, spurring a jump in supply at a lower cost. Tax hikes tend to increase the cost of production and can shift the supply curve to the left. Supply and demand diagrams give you a high-level picture of what these shifts look like, so you can plan for them.

Graph supply and demand with FigJam

Creating an insightful, actionable supply and demand diagram doesn’t have to be hard. With FigJam, you can quickly brainstorm, capture team input, and create a clean, polished graph. To set your chart apart, use Figma's tools to add your brand colors, custom illustrations, and animation. With your supply and demand graph, you'll unlock new ways of seeing and shaping your business—and its place in today’s competitive market.

Start your supply and demand graph with FigJam

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