Supply and Demand
Possibly the most foundational principle in economics, the concept of Supply and Demand governs prices, production, and consumer behavior, making it vital for entrepreneurs and managers to grasp how it works.
At at basic level, supply and demand are the interactions between a producer’s ability to make a product available(supply) and the desire for that product to be bought by consumers(demand). When these two are graphed out, they can be used to determine the price and quantity of goods or services.
Law of Demand: As prices decrease, the quantity demanded increases, and vice versa. This creates a downward-sloping demand curve.
Law of Supply: As prices decrease, the quantity supplied rises, and vice versa, resulting in an upward-sloping curve.
When these two curves intersect, it is known as the equilibrium point and the ideal point of production for entire markets.
There are also a couple factors that can shift the entire curve, these factors will move the Supply or Demand Curve to the left or right, with a right-ward shift indicating an increase in Supply/Demand.
Shifters of Supply:
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Subsidies and Taxes
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Technology
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Other Goods
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Number of Sellers
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Expectations for the Future
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Resource Costs
Shifters of Demand:
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Buyers(number of)
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Income
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Tastes and Preferences
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Expectations for the Future
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Related Goods(Compliments and Substitutes)
Use the acronyms “STONER” for Supply, and “BITER” for demand to remember the shifters. Then, you can reason how these factors will affect the graph. For example, if resource costs increase, you can reasonably presume that Supply would decrease as it costs more to make each product -> Supply shifts left. If the number of Buyers increases, then more people will want/need product, thus demand would increase -> shift right.
Supply and Demand are powerful tools for understanding how markets operate and how external factors can influence them. By recognizing the laws that govern these forces, you can make more informed decisions for the future.
“Fundamentally, all marketing exists to influence the supply and demand curve” - Alex Hormozi
