“Let’s Introduce Supply and Demand”
Economics is a very complicated subject. If you are or have been a student in this department, you will know exactly what I am talking about. Most people brush it off saying it’s just a matter of memorizing facts and numbers. That is as far from the truth as it can get. If one could get better in this subject just by the power of memory, the economy would not be as screwed up as it is today.
Understanding the reasons behind facts and trying to predict what they mean for the future is what this field is all about. The best of the best in this field are all brilliant at remembering stuff yes, but they are also good at drawing conclusions from it rather than just stating them at random. There are several pillars that hold this world together. One of the most important ones is that of ‘Supply and Demand’.
Everyone has heard of this phrase at least once or twice in their lives. It is used almost everywhere starting from your workplace to the movies you see on TV, and there is a good reason for it. It is in basicity very simple to grasp in concept and as such known to most people even if they do not specialize in economics. That being said, understanding the nuances behind this concept is a completely different thing.
So today I am going to be discussing the basic stuff about Supply and Demand, what makes it tick, where it came from and what you can actually do to take full advantage of this knowledge. Don’t be overwhelmed. While it is not a complete walk in the park, it isn’t rocket science either. Just pay a bit of attention and you too could make it work for yourself in the practical field.
What Does It All Mean?
Before we can delve deep into the more advanced concepts that make Supply and Demand tick, let’s first talk about what it exactly is.
As you can see, the two things go hand in hand. Without supply, the demand cannot be fulfilled. At the same time, without demand, there is no point of generating any sort of supply. The two things need to coexist in order to make meaningful sense. In less technical terms, supply is how much of their products companies are willing to make. Similarly, demand refers to how much customers are willing to buy them.
The Law of Supply and Demand
Because Supply and Demand are two things that depend on each other, it is only natural that they affect each other as well. The effect is on the prices of products in the market. The way it usually works is that more the demand for something, greater the price. Obviously, there needs to be a limit to how high the price can reach since other business will take advantage of sky-high prices by reducing their own prices and attracting potentially lifelong customers.
So the trick is to set the price at a point where the demand from customers stays intact for a long period of time. Efficient allocation of resources needs to take place in order to determine the perfect sweet spot for setting the price of a product at. This price will overall reflect the point at which both seller and buyer are willing to come at an agreement with each other.
This is also why there are certain products whose price ranges are constantly changing all the time. The market is simply built like this from the very bottom. It is inevitable.
Now you may be thinking what the initial cause of Supply and Demand actually is. Which one came first? Since both of them are seemingly the cause of one another, there has to be one that came before the other right? It’s like the age old question of the chicken and the egg. However, there is a concrete answer for that in the world of economics.
While there are exceptions that can be made and contradictory cases presented, it is safe to say that the demand comes first. Supply is simply a product of that demand. Without the need for something, why would an entire business dedicated to producing it exist?
As such, it is important to understand why the demand came to be. After all, there needs to be a reason why the need for something arises. While these reasons are varied, they can be summed up within a few points in general. Some of the important ones are as follows:
Sometimes, preferences change. There can be numerous reasons why people stop using a certain product and want to go for another. Such a thing is impossible to predict but one thing is for certain, it does affect the overall supply patterns for businesses.
Another reason why demand for a certain commodity can increase is because of the change in direction of other alternatives. For better or worse, if competitor products change their nature, it shows through the customer.
The demand for something is only as good as the number of people wanting to buy it. Higher this number, more the demand. It is pretty simple. The number of buyers for a certain product can change from time to time, and with that the supply for it will also tend to change.
People have a certain idea about the thing that they are going to buy. The difference between their expectation and reality can prove to be a huge factor in the overall demand for said product.
These are the four main causes of demand that you will get to see in your everyday life. Just look around in your house. Find a random product and you will find that its demand can also be classified into one of the points mentioned right above.
Why It’s Important to Business
As you can clearly see, Supply and Demand forms a major part of the world of economics. To no surprise, it is important in the field of business as well. Understanding how it affects said fields is what you should be interested about. If you can understand how it all works, you can perhaps use that knowledge to make your own chances much better.
There are plenty of reasons why Supply and Demand is extremely important for business. Based on the market, based on what people like and based on the company itself, there are various situations which need to be addressed that can be affected by this phenomenon. So let’s talk about some of the various ways in which business is affected by it.
For the most part, Supple and Demand is seen as a measure of the sales made to a consumer. However, the two things being dependent on each other, it also affects the expenses of the company in question as well. After all, all of the money that is being spent in order to buy raw materials, machinery and labor are spent in order to deal with the current demands.
At the same time, if there was no demand for anything in the first place, there wouldn’t be any need for supplying anything at all. Meaning there would be no existence of any business whatsoever. Not only that, a drastic change from one state to another also causes a huge change in the business world.
If a company is based around a certain group of people and then they happen to leave for close for whatever reason, the business which is dependent on them will also likely go down. Everything is interconnected with one another. The production of good is only a singly spoke on a huge wheel that consists of several other spokes as well.
Another important thing that you need to be aware of is this little thing called elasticity i.e. in terms of the prices of the products. What this means is that even the smallest change in the price of a certain product can cause a huge change in the world of business. The comparison is made keeping in mind how elastic objects tend to change their shape by quite a lot even with the minimum amount of force applied.
Usually, such goods are luxury items that people can live without. After all, if it is something that people do not require to begin with, why would a change in price affect that chain of thought?
By the same line of thought, there are certain products that are simply price inelastic. As you might have guessed, these are products that do not change in their amount of sales even if there is a change in their overall prices.
Naturally, these are products that people really need all the time – everyday objects and items that people simply cannot live without. Even if there is a sharp change in the price of the items (for better or worse), the reaction of people towards them will not change whatsoever.
A good business will know how to balance out the elastic and inelastic items. The change in prices will affect the overall model of supply and demand by a lot. This is why business must keep tabs of what is important and what is not and alter them accordingly to their needs.
The industry of businesses varies a lot. There are plenty of industries which depend massively on what time of the year it is. There are certain seasons where the business will inevitable do really well whereas there are ones where they simply do not. It is up to the sellers to decide how to balance things out and make sure that the scales of Demand and Supply never tip over to one side completely.
The best example of something like this is ice-cream. Go for a walk on the street during summer and you will find plenty of shops selling them. In winter however, you wouldn’t find one even if you were prepared to give up your soul for it. As such, the demand for ice-cream depends on the time of the year and as such, the prices should reflect that accordingly.
For instance, in summer everyone is inclined to buy an ice-cream to suit their needs. As such, it is the perfect time to raise the prices even if it is just by a bit. By similar logic, no one would want to buy one during winter. Thus, it is only natural that the prices be reduced by quite a lot so that people want to buy an ice-cream simply because it costs less.
This applies in various other places as well. Restaurants, boutiques, fish shops etc. are all affected by this phenomenon. So the idea is to balance out the profit and loss between the different seasons so that the overall profit remains constant and favorable at all times. You cannot control the seasons but you can control the prices at which things are sold.
The Gist of the Story
The lesson to be learnt here is that Supply and Demand is something that will never cease to exist. As long as human society exists, there will always be the need for something or the other. It is up to other people to provide those things and make a living for themselves out of it. If you take the advice we have given you here, perhaps you too can turn your fortunes into something more glorious.
Michelle Johnson, one of the most promising MBA students to ever come out of The Harvard School of Business also happens to be someone with more than 6 years of practical experience as well. If there was ever someone who could have answered your queries on economics, this is the person.