Supply and Demand: What is it and How to Benefit

Introduction

While it may seem like an easy concept, supply and demand prove their significance through everything from how many strawberries there are in the Walmart grocery aisle to how quickly you can sell your old furniture or eBay. Understanding the concept of supply and demand is valuable to both business owners and consumers.

The Law of Supply and Demand

The Law of Demand states that the demand of a good will decrease as the price increases, and increase as the price decreases. Because a buyer's financial resources are often finite, asking for a price above a majority's means that the only people who are able to afford your product are those with above-average purchasing power, limiting who is interested in your product.

The Law of Supply states that a high price of an item tends to boost the supply of the item because the high price incentivises manufacturers to produce it. Conversely, the lower goods or services are priced, the less of it will be produced.

A market clearing price that is low enough can interest consumers to purchase (increasing demand), and one that is high could convince manufacturers to produce (increasing supply). Graphically, it is the point of intersection where both the demand and supply curves intersect. This is the point of Equilibrium.

The degree to which the price of a product changes is based on the principles of supply and demand, aka the product's price elasticity

Demand for basic necessities is mostly inelastic, meaning that it doesn't change easily in the face of price fluctuations. For example, people will continue to pay for electricity even if it costs an extra 100 dollars a month because it is needed so much that people are willing to pay the extra price

Factors Impacting Supply

Production Costs: High production costs may force businesses to have to raise the retail prices on their goods and services. For example, if a new technology company invents a drone that is able to deliver goods effectively and is easy to navigate, but is not able to profit off of it due to expensive materials and lack of demand due to high pricing, the company may not be able to make more of the drone because there is no profit in doing so. Cutting down supply costs will lower prices for consumers.

Technological Improvements: Improvements in manufacturing technologies as well as more efficient transportations, fuel, and navigation technologies will cut down on both manufacturing and transportation costs, allowing companies to sell more goods, and increase their profits. For example, if a popular company sells tank tops for 100 dollars each but is always out of stock due to poor production and transportation chains, improving their transportation and production efficiency will allow them to meet their demand without having to lower prices, thus increasing their profits.

Factors Impacting Demand

Income Levels: This seems obvious but when individuals are unemployed or on a tight budget, they may not be incentivised to buy items that they see as unnecessary. This decreases demand for material goods such as clothing, home decor, or the latest smartphone. When Covid 19 hit, many people became unemployed as the country went into recession, businesses were further harmed when they were not able to make sales due to a lack of demand, worsening the country's situation. Demand is closely intertwined with income levels and often depends on individuals being financially well off.

Quality: While there is nothing you can do to fix recessions and a societal reduction in demand for luxury items, increasing the quality of your products may convince consumers that even though your price may seem high, it's worth it as the product is long lasting and durable. At the end of the day, the price of an item is determined by how much an individual values the item. If a customer buys a designer handbag for 10,000 dollars, it means they value the bag enough to exchange it for 10,000 dollars. Increasing the value of your product in the eyes of the consumer may make them more willing to purchase your item, increasing the demand of your product despite its high prices even when there is a recession.

How Business Owners Can Increase Supply and Demand

As mentioned by the points above, increasing production and lowering retail costs as well as increasing product quality and advertising efforts will ensure that you will make more sales while maximizing profits.

Conclusion

Understanding the rules of supply and demand and knowing how your business plays into these concepts is key to pinpointing how the different parts of your business play into you maximizing sales and minimizing production costs so that you can help your business thrive.

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