[Guide] Supply and Demand

[Maserati 4]

Supply and Demand

Hey everyone, I hope you are all as excited for this game as I am. This community is thriving and very friendly and supportive,

so I have decided to write a quick overview of a market force called Supply and Demand, to help people who don't know much about economics learn.

 

What is Supply and Demand?

          Supply and Demand is possibly the most influential market force in economics and business. On the surface, It's quite intuitive, honestly; and it has to do with businesses that focus on production and marketing. (For any business where you are selling something, this is important). Basically, Supply is the amount of product that your business has (and is willing to sell). Demand comes from the consumers, and is reflective of how "popular" your item is. (Or, more specifically: "An economic principle that describes a consumer's desire and willingness to pay a price for a specified good or service") 

How do they interact? 

         On the surface, it might seem like Supply and Demand have a very simple relationship. However, it's not as simple as 'if one goes down, the other one goes up'. There are other variables that influence this trend. The two main ones are Price and Service (Quality).

 

However, before we look at Price and Service, let's look at how Supply and Demand interact if Price and Service stay constant:

High Demand + High Supply

This is a very good outcome for your product, and will allow your business to grow and prosper. This means that you have a surplus of your product, but people want to buy them. This keeps the price stable, and allows your business to prosper, and your product to become more popular. This is great for any growing business, and what you should shoot for to start off, (Technically you can't really control Demand too much, without lowering the price, so if you want to make a profit, make sure you are selling something quality, that people will want to spend their money on). [IRL Example: Gasoline] (<-- People need it, and there is a good supply of it)

High Demand + Low Supply

This is most likely the ideal outcome for your product, but is a gamble, and also takes a long time to get established (Unless you are unbelievably lucky). High Demand and Low Supply allows the price of your product to skyrocket, guaranteeing you massive profits. It is true that you will be selling less of your product, but since the price is so high, you will make up for selling less of your profit. However, it is hard for something like this to get situated. I'll provide a specific real world example: Yeezys. This is a shoe brand that makes a small amount of their product when they are release, but sell them at ridiculous prices. However, the demand is so high, that the shoes sell out in seconds. The shoes most likely don't cost very much to make (although they are quite well made); however, due to skillful branding and marketing, they make incredible profits.

 

       Wait a second...

You might be asking yourself; "If these shoes are cheap to make and everyone wants them, and they sell out so quickly, why doesn't the shoe company just keep the price the same, and make more of them to sell?"

Well, if this worked, then the company that makes Yeezys would start mass producing them at extreme rates. The reason this doesn't work is because increasing supply will lower demand, especially if that product relies on being rare to have value. In this specific case, people buy Yeezys because it gives them a sense of class; their worth comes from the shoes themselves, but is amplified by the fact that not very many people have Yeezys. If suddenly more and more Yeezys are available for people to buy, more and more people will have access to them. The people who once thought they were a higher class because of the shoe they wore (which I think is asinine, but that's my personal opinion, and my friends say this is the main reason they buy expensive shoes), now see more people wearing Yeezys, and the worth decreases for them. This means that Demand will fall, and the company that creates Yeezys will be forced to decrease the price of their shoes for more people to buy them. 

 

Low Demand + Low Supply 

This is bad, like, really bad. This is how most small businesses fail in their infancy. The business doesn't have enough resources to create much of their product, so they are forced to raise the prices so that they can break even, and pay their Overhead (Overhead = What they paid to start their business in the first place). However, since they are forced to have high prices for their product (Which hasn't gained much popularity since it's new), the Demand drops, and the company is doomed to fail. The only way this can be fixed is to:

(A): Drop that product and make a new one, that people will want to buy, and is realistically profitable;

or

(B): Drop the price of the product. This will make your company go into even more debt, but will give your product the chance to gain in popularity, subsequently allowing your to raise the price later. (This is very risky though, and can potentially ruin you even more). 

[Real life example: Rare, but useless metals, or materials] ((Sorry I couldn't think of something better, can someone comment below something with Low Supply and Low Demand that is prominent in today's society?))

 

Low Demand + High Supply

If you thought Low + Low was bad, well, it gets worse. Imagine you start a business, and you pour a ton of money into it, to make a large amount of a product that you think will catch hold and have a demand. You are able to make a ton of your product, (which cost you a lot of money), but nobody wants to buy it. Now you are stuck with a large surplus of an item that you can't sell, (at a profitable price), and you are forced to sell it for a cheaper price. (Sometimes people don't even want it when it's cheap, and that is just a total failure). 

 

 

Price and Service and how they factor in:

Price and Service factor in intuitively; If you increase the price of a product, Demand decreases, which increases the supply of the product, and decreases an overall profit of the product. (As in, the individual profit will increase, but the product as an entire whole will decrease, as less people will spend money on it). (Technically, only part of Demand decreases. The customer's desire to buy the product stays the same, but their willingness to buy the product decreases, and if you want to get really into it, the customer's desire actually increases as price increases, since people want to have something worth a lot of money, (Only if it is something of material value), However, this is getting too complicated for an overview, and I only know the basics myself anyways.) If the price of a product decreases, the Demand increases, however this lowers the supply of the product, and also decreases individual profits. Now for service (or quality); If the quality of the product is high, then people will want to buy it, and the price can be increased. However, if you are selling a low quality product, the demand will decrease (Unless it's fast food, which is an anomaly, and relies on other factors, that I will get into now). 

Other forces that are a variable in supply and demand

Of course, Economics cannot be simple, and there have to be a ton of hidden variables in determining a product's success. These include, (but are definitely not limited to:)

Marketing / Branding

Convenience 

Necessity

(These are the main ones, I can't think of any more right now, but please comment below and I will add them) 

 

Marketing

Put simply, you could have the best product in the entire world, with a low price, and a desire from people to buy that product. However, if nobody knows about that product, nobody is going to buy it. This is where Marketing comes in. People need to know what you are selling, and you need to convince them that your product is great. This can be done in a variety of ways, and in the real world, marketing officers are paid millions of dollars to come up with advertisements, or even unnoticeable jingles or phrases, that secretly manipulate consumers into spending their money. (Example: McDonalds jingle; "da da da da da I'm lovin it", whenever you hear that, you think of McDonalds; whenever you think of McDonalds, you think of food. Now that you are thinking of food, you realize: "Hey, I'm pretty hungry, I'm gonna go take a stop at Micky D's!) 

Branding

Branding is similar, but not really. Branding means attaching a name to a product that has significance. This makes a giant impact in the clothing industry. A shirt is just a shirt, but if it has "Calvin Klein" on the logo, it suddenly is worth more...(But is it? That's the power of branding, a name adds more "worth" to a product). Some companies also do this with celebrities. They will hire a famous person to rave about their product, and to be a star of their commercial (Subway is especially notorious for this). People watching the cartoon think "Wow, that person is my idol, and he likes Subway? I'm going to go buy 23 Subway footlongs to show that I'm just like Michael Phelps! (Michael Phelps has been in so many Subway commercials I have lost count) 

Convenience

Convenience is exactly what you think it would be. Fast food is terrible quality, but it is cheap and convenient, so it has a high demand. Fast food joints added drive-thru's because they make Fast food even faster, which adds more consumers, and subsequently more revenue. 

Necessity

Necessity is also exactly what you think it would be. People don't buy gasoline for their cars because they want to, they buy it because they need gasoline for their cars to run. This makes the demand skyrocket, and allows the demand to stay very high. (Gasoline isn't an ideal example, since you don't need gas to survive, so it's not a complete necessity. A better example is Food.) Basic food items, water, housing, etc. will always have an extremely high demand, since they are needed to survive. 

 

So that's it! Thank you guys SO MUCH for reading this, and even if you didn't, thank you for viewing this anyways  Please comment below anything I can do to improve this guide, and if I was wrong about something, please correct me in the comments (I would appreciate  if it was constructive), and I will do my best to amend this guide so that everyone can have a better understanding of Economics!

Edited August 11, 2017 by Maserati

[Ferrari 2]

Dude this is gonna get some many people started with marketing great guide!

[America 8]

Definitely an interesting guide! I'm sure that a lot of people could use these tips in their businesses. Thank you for the insight, i'll definitely refer to this in my businesses!

[Porsche 0]

 

8 minutes ago, America said:

Definitely an interesting guide! I'm sure that a lot of people could use these tips in their businesses. Thank you for the insight, i'll definitely refer to this in my businesses!

I'll be looking at this too, could be useful