The basics of supply & demand
|The law of supply and demand|
|What is supply?|
|Yeah, but how does this apply to everyday things?|
|What else affects supply?|
|What is demand?|
|Wait a minute… how does this affect me?|
|Finding a balance|
|Social media marketing|
|So, how do they get it right?|
You’ve heard it talked about many times in the news, but do you know what it is? Supply and demand are the cornerstones of economics.
They underpin society and are one of the driving forces behind innovation and market growth.
More than that, supply and demand are fascinating topics and provide a solid theory for how huge businesses can operate successfully.
Today, we’ll dive into the basics of supply and demand, some supply and demand examples, and even supply and demand theory.
The law of supply and demand
The law of supply and demand is the economic correlation between the sellers and buyers of various commodities.
A commodity is a valuable good, such as corn, copper, and oil. Or the good stuff such as coffee and chocolate. The theory of supply and demand focuses on the cost of a product and how it’s impacted by both scarcity and demand from the consumer.
Let’s explore what this theory consists of and how it applies to modern-day society.
Also, earn about economic indicators
What is supply?
Supply is the total of a given product or service a supplier offers to consumers at a particular time at a specific price.
The main factor behind supply is market movement. One obvious example is that higher demand will set a higher price for a particular good or service, directly impacting its supply.
Yeah, but how does this apply to everyday things?
Well, this includes items such as the PlayStation 5. This games console has a huge demand, so much so that Sony is struggling to keep up with the supply.
Huge market shortages have resulted in Sony’s ability to set whatever price they wish and manage the supply accordingly.
What else affects supply?
Another problem that has recently caused a surge in price is a supply chain issue that occurred following Russia’s invasion of Ukraine in 2022.
This put a strain on food and petrol prices globally as the Biden administration imposed sanctions on Russia, causing supply to be squeezed and the price to naturally increase as the demand remained at a steady constant.
Supply can be affected by consumer demand and can be driven by external world events, as this year has shown us.
also read: market volatility
What is demand?
Demand is an everchanging beast in the field of economics. A variety of factors drive it. As the value of commodity increases, the demand for the product will more than likely increase.
Wait a minute… how does this affect me?
For argument’s sake, let’s say the product we are discussing is the latest iPhone, sold for a fixed price of $10 per phone.
This would result in an explosion in the number of people purchasing them. You’d probably buy a few of those, wouldn’t you?
Many others would probably have the same idea due to the low price of a high-quality item.
As the vast majority of people can afford a mobile phone and they provide a significant utility, the demand for them will continue to be high.
Now, let’s say Apple decided to charge $100,000 per phone. It would become a rare collector’s item, reserved exclusively for the rich.
While most people would still like to own an iPhone, demand for them would be extremely low at that price. Although I’m sure we all know at least one person who would financially cripple themselves to tell everyone on Instagram, they had a $100,000 phone.
Finding a balance
The item’s price is one of the key variables that will drive supply and demand. Businesses and providers of the goods need to ensure they’re charging a fair price so that they can make a profit.
However, they also ensure that the consumer feels like they’re paying a fair amount.
Social media marketing
One modern example of demand is social media marketing. Creators on TikTok and Instagram who have millions of followers will sell products or use their platforms for advertising.
The number of followers directly correlates with how much influencers can charge.
For example, Snoop Dogg has 75 million Instagram followers and could charge thousands of dollars for an advert on his story or as a sponsored post.
Cristiano Ronaldo is the most followed person on Instagram, with a staggering 477 million followers. He’ll be able to charge a lot more than Snoop Dogg as he can supply a much larger market base for potential advertisers.
This is a fairly obvious example of how demand works, but it clearly evidences how demand plays out in today’s economy.
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In conclusion, the reality of the supply and demand theory relies heavily on many balanced elements. The price of the good is the key detail that can drive supply and demand in equal measure.
It’s natural for the consumer to look for the best value and the lowest price. By the same token, businesses or companies selling the product are motivated to increase output.
It is natural for them to have an appetite to increase demand and maximize profit. It’s a fine-balancing act that requires analysis and research to get it right.
Charging too much for an item or producing too much can adversely affect their business model and profit margins.
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So, how do they get it right?
An ideal circumstance for us as consumers would be the good or service we were looking for, being completely free.
However, it goes without saying that producers need to make a profit to maintain the development of their services or goods. As we mentioned, though, it’s a balancing act.
Consumers will go to a rival producer if prices begin to verge on the unacceptable. They will no longer want to buy it and find somewhere where it’s cheaper.
A fair market must be set for the producer and the customer so that a happy middle ground can be found.
We have only touched on the basics of supply and demand today, and there’s an incredible amount of analysis on the topic both in academia and online.
However, it is a key theory you need to grasp as a bedrock for learning more in-depth economic theories.
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