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A successful business adapts to supply and demand and even influences it. This guide will help you understand supply and demand and why it matters for your business. We may receive compensation from partners and advertisers whose products appear here. Compensation may impact where products are placed on our site, but editorial opinions, scores, and reviews are independent from, and never influenced by, any advertiser or partner.
As a small business owner, you're constantly thinking about supply and demand, even if not specifically in those terms. You're wondering if people will buy a new product you're developing, for example, or you're trying to figure out if you have enough units on hand to fill all the orders customers made after a marketing campaign.
While we all implicitly understand the importance of supply and demand in the business world, it's worthwhile to explore exactly what it means on a practical level for achieving your business goals.
Whether you run a seasonal business, own a vacation property for passive income, or operate a more standard business entity, basic economics like supply and demand should matter to you.
Here are seven reasons in particular that should drive your thinking as you plot out your business's future. The supply and demand curve has an inescapable effect on the pricing of the products and services you offer. A lack of market demand will force you to lower prices in order to move products off the shelves, while a lack of supply may cause prices to skyrocket. Example: McDonald's Dollar Menu revolutionized the fast-food industry when it rolled out in the early s. Supply and demand has a big impact on the competitiveness of a company.
For example, if a firm loses access to supply, they are unable to satisfy customer needs and risk seeing them flee to a competitor.
A plunge in demand for a product provides an opening for a competitor to offer an alternative to customers and take market share. A rival may also cut prices in an attempt to drive demand. Example: Amazon has grabbed a stranglehold on the online retail market by driving prices as low as possible, often selling items at a loss. After subtracting the profitable Amazon Web Services and Amazon Prime portion of the business, the retail portion of Amazon loses billions of dollars annually.
This has given Amazon the power to force many smaller retailers out of business and take over more market share in their absence. Greater demand for a product or service gives the firm the opportunity to grow the business, hiring more workers and increasing capacity to match the demand. On the other hand, oversupply and low demand forces businesses to contract, laying off staff and closing factories. Companies must achieve the appropriate balance for consistent and sustained expansion.
Example: Blockbuster once owned more than 9, video rental stores across the nation, but by they had declared bankruptcy. Outside market price, demand can generally be influenced by the following factors: Utility.
While goods and services that are necessities such as food do not see much fluctuation in the demand, the demand for items deemed of lesser utility even frivolous would vary according to income and economic cycles. There are important differences between discretionary and non-discretionary spending.
Income level. Income, especially disposable income, is directly proportional to consumption. A population with a high-income level has much more purchasing power than a population with a low income. Involves an increase in the money supply in relation to the availability of assets, commodities, goods, and services.
Although it directly influences prices, inflation is outside the supply-demand relationship and decreases the purchasing power, if wages do not increase accordingly. The quantity of capital available in savings can provide the potential to acquire consumption goods.
Also, people may restrain from consuming if saving is a priority, namely in periods of economic hardship. The wide availability of credit in a fiat currency system has considerably skewed the relationships between savings and consumption as it promotes current consumption levels but at the expense of future consumption.
Supply, Demand and Equilibrium Price Delimitation and Variations in Market Areas Supply is the number of goods or services that firms or individuals are able to produce taking account of a selling price.
Outside price, supply can generally be influenced by the following factors: Profits. Even if the sales of a product are limited, if profits are high an activity providing goods or services may be satisfied with this situation.
This is particularly the case for luxury goods. If profits are low, an activity can cease, thus lowering the supply.
Competition is one of the most important mechanisms for establishing prices. Where competition is absent an oligopoly , or where there is too much over-competition , prices artificially influence supply and demand. Competition over Market Areas Competition involves similar activities trying to attract customers from a similar pool.
The two most common are: Market coverage. Activities offering the same service will occupy locations in view to offer goods or services to the whole area. This aspect is well explained by the central place theory and applies for sectors where spatial market saturation is a growth strategy convenience stores, fast food, coffee shops, etc.
The range of each location is a function of customer density, income distribution, transport costs and the location of other competitors. Range expansion. Existing locations try to expand their ranges in order to attract more customers. Economies of scale resulting in larger retail activities are a trend in that direction, namely the emergence of shopping malls. Taken individually, each store would have a limited range.
The Mayo Clinic's Gonda building as seen from the cafeteria. All hail the libertarian fetish. Whatever the problem, the market will solve it. Such ideology ignores the social science model. The graph of supply and demand abstracts human behavior. We can predictably price human wants and needs.
That same model of supply and demand applies to migration. We expect the supply of movers to reach equilibrium with the demand for movers. Labor votes with its feet. For the sake of this post, I will run with the libertarian ideology. Fireworks experience a boom at the Fourth of July in America. Lee Morgan is a fiction writer and journalist. His writing has appeared for more than 15 years in many news publications including the "Tennesseean," the "Tampa Tribune," "West Hawaii Today," the "Honolulu Star Bulletin" and the "Dickson Herald," where he was sports editor.
Share It. Accessed March 21, Consumer Affairs. Federal Trade Commission. Office of Energy Efficiency and Renewable Energy.
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