Law of Supply & Demand

Law of Supply and Demand

As we know in a perfect world there would exist equilibrium. Meaning there is exactly the right amount of customer demand for a particular product or service and exactly the right amount of supply for that same product of service. Unfortunately, we do not live in a perfect world, but a non perfect world means opportunity in the eyes of the business.

The law of supply states that the quantity of supply is related to price. So, of course the smaller the supply, the higher the price, would this just make sense? For example when a new I-phone is getting ready to come out the demand for it is higher than the supply. This is because the new I-phones are being made. Now when we deal with the law of demand we have the opposite effect, the larger the supply the lower the price. For this example many grocery stores tend to have weekly sales to get rid of the supply they have. With this said they lower the prices to get the consumer to purchase the items and this at times makes the consumer purchase in higher quantities because thy know the price will soon rise. This is a simple enough rule but often one that is ignored. When you first start looking into what type of business you would like to start you need to consider this rule. You need to make sure you can distinguish between the laws of supply and demand. Will the new business that opens have a high demand for its products being sold? Also what about the supply itself? Is the business prepared to keep up with the products on their shelves? Otherwise the business what opens up could find it's self in a bind where the business that has too much competition for too few customers. Ignoring the law of supply and demand will push it in becoming extinct pretty quickly.

When considering a business to start you need to determine what the existing demands are for that product or service that will be offered. Also whether the demand is growing, beginning to level off or in fact already declining. The best way to tell is by how many new businesses have entered the field within the last few years that are in the same category. Avoiding the seemingly hot businesses where you might find yourself entering the field late. When a market is new and growing it is easier to get in on it but if the field has already become saturated with new businesses leaving your business out in the cold weather.

A good example of supply overcoming demand that I ran into was the micro-brewery beer business. While this is still a strong business for existing companies it has been much harder in recent years for new businesses to enter the field. But at one time it was a lot easier as the trend was just catching fire in the United States. Many entrepreneurs opened pubs and launched beer labels during the 1990's with great success, but, eventually the market reached that saturation point and any new businesses began to fail.

Supply and demand also covers many other aspects of business that you need to consider. The space you lease for example. Hot shopping centers will be more in demand and will cost you more to get in as a result. Wages in a particular industry are subject to change based on the market. When you consider introducing a new product to market you have to consider the possibility of there being a demand shortfall. This situation would occur if the demand that you projected there would be isn't realized when your product of service is introduced. All of these factors related to supply and demand will have an impact on your business whether now or in the future. The law of supply and demand can be seen as the great equalizer in business. If you enter into a business with not enough demand you are likely to fail. Whether you are starting a new business or launching a new product or service, finding out exactly what the demand is as well as the current supply for the venture you are considering is critical to your ability to succeed. If you do not you may find yourself a victim of the law of supply and demand.

Example of a supply and demand graph:

Elastic and Inelastic

Then