In this article, you will learn about the law of supply and demand.
Table of contents
Price determination in the marketplace is based on supply and demand. Understanding the underlying principles of this law will help you better understand the market.
An overview of the factors affecting supply and demand is provided in this article.
What is the law of supply and demand?
The law of supply and demand governs the relationship between sellers and buyers of various goods. According to the theory of supply and demand, the price of a product is determined by the product’s supply and demand. The more expensive the product is, the more it will be sold.
Keeping the price high, on the other hand, may have a negative impact on how customers view the product. Customers may switch to a less expensive alternative if they don’t believe the product is worth the high price. A decrease in supply can result from a decrease in demand.
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What is supply?
The relationship between the price of a product or service and its availability in the market is called supply. Sellers will increase the amount of product they sell if prices rise and remain high. The supply chain is highly responsive to changes in demand and pricing. When demand and price shifts, the seller has to adjust their supply to meet the new conditions.
What factors influence the supply of a product?
Capacity to produce
It is the ratio of output to input that determines a company’s production capacity. Increased demand will prompt the manufacturer to increase production in order to meet the increased demand.
Costs of production
Materials, wages, and utilities like electricity and water are examples of production costs. The market price of a product will rise if production costs are high. The supply will rise if the market can withstand high prices. A decrease in supply will occur if it cannot.
Competitors
A company’s competitors are those that offer the same or similar goods or services at a comparable price point. For a company to keep producing products at a reasonable price, consumers may have to choose between competing products. Depending on the market, they may reduce production or shift their focus to other products.
Availability of resources
Access to low-cost raw materials can aid in the expansion of production and the supply of goods on the market. The production will fall and the market supply will be reduced if the raw materials are not readily available or are too expensive.
Supply chains
A well-managed, cost-effective and reliable supply chain must be in place at all stages of the production process. That will ensure that there is enough supply in the market to meet the needs of consumers.
What is demand?
For a product to be in demand, consumers must be willing to pay for it at a range of prices. As long as the price of a commodity remains within a certain range, demand will remain stable. As a result, buyers will no longer find the products affordable after that point, and as a result, there will be less of a market for them.
What factors influence the demand of a product?
Product price
The demand for a commodity decreases as its price rises. Because of the higher price, people will look for alternatives that are less expensive.
Revenue from the sale of a product
A product’s demand will be determined by the buyer’s ability to purchase it. Consumption capacity increases as income rises; a decrease in income decreases consumption capacity and demand. The standard of living and the quality of the goods we buy are linked.
With a rise in income comes a rise in demand for high-quality goods, and a decrease in demand for low-quality goods. Quality goods will see a drop in demand, while low-cost goods will see an increase as incomes plummet.
Preferences of the buyer
Customers’ preferences for a product are affected by trends, as well as changes in societal norms and practices. If a product is popular, demand will rise, but that can change quickly if the trend shifts.
Buyer Expetations
Buyers may increase their demand for a product if they believe it will become more difficult to obtain, more expensive, or unavailable in the near future. There is a direct correlation between current demand and future pricing because they expect to buy and stock more of it at the present time.
Alternatives that can be used
As the price of one commodity rises, so will the demand for cheaper alternatives. For example, if the price of a particular brand of cereal you buy regularly rises to an unaffordable level, you may switch to a less expensive brand. As a result, there will be an increase in the demand for less expensive and more readily available cereals.
Complementary goods and services
Price increases on one product can lead to a decrease in demand for the other if the products are complementary. As a result of the price hike, the two products will no longer be able to be used together. It would be prohibitively expensive to use a printer if printing ink cartridge prices rose at an exponential rate.
Size of the market
The number of buyers purchasing available products is determined by the size of the market. There will be few buyers if the market is small and the demand for the commodities is low. As the market grows, so will the number of buyers for the products, and the demand for them.
When the market for buyers of a certain age group grows, so does the demand for the commodities that this age group typically requires. For example, if birthrates rise in a given area, demand for baby food and similar products will rise as well.
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What is equilibrium price?
The point on a graph where supply and demand curves intersect is called the equilibrium price. The price that both the producer and the buyer consider to be reasonable and beneficial is known as the equilibrium price. The producer can make as many products as they want at this price point, and the buyer can buy as many as they want. Many businesses use supply and demand charts to figure out how much of a product to produce and at what cost.
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