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Law of Supply and Demand Defined
Striking the right balance between a price that drives demand without underselling your products or services can mark the difference between a business that thrives and one that doesn’t survive.
Charge too much, and you might scare away your customers. Charge too little, and you could face challenges with growth. That’s why business owners and operators must get a good understanding of the law of supply and demand and how it can help.
In this thorough guide, we’ll dive into everything you need to know to master the law of supply and demand and how to implement it in your business.
What is the Law of Supply and Demand?
The law of supply and demand is an economic theory that states that prices are determined by the relationship between the supply and demand of a product or service. The theory is formed by combining the fundamentals of the law of supply and the law of demand.
Specifically, it suggests that if the supply of a good or service is greater than the demand for it, the value of such declines. Alternatively, it also suggests the opposite, that if the supply of a good or service is less than the demand for it, the value increases.
We can find many examples of this in our everyday lives. From food prices rising when crops have a bad year, to hyped-up items going down as the market saturation increases.
What is the Law of Supply?
The law of supply is a fundamental economic principle that states that as the price of a good or service increases, the quantity of such goods or services supplied by producers or providers also increases. Alternatively, if the price of a good or service decreases, so does the quantity supplied, as long as all other factors remain constant.
Put simply, the more demand a product has and the more profit it yields the more businesses will be incentivized to produce more of it to capitalize on the gains. On the other hand, if a good is not in demand, a producer might lose money by producing too much of it and being left with additional inventory or not being able to recover their production costs.
What is the Law of Demand?
The law of demand is a fundamental economic principle that explains consumer behaviors and shapes pricing strategies for organizations. It states that as the price of a good or service decreases, the quantity demanded by consumers increases, with the opposite also being true.
For example, if the price of drinking a coffee at an establishment is $3, more consumers would likely be incentivized to consume it than if it was $15. That’s because a lower price increases demand.
There are of course several variables that come into play here, like income levels and personal preferences and even some exceptions like luxury goods or gifts. That’s because higher prices can sometimes increase demand due to perceived exclusivity, making luxury items an exception.
Medications might also be exempt from the rule sometimes, as they may have stable demand regardless of price changes.
But generally speaking, if all other factors remain the same, the law holds true in most other cases.
What is Equilibrium Price in the Law of Supply and Demand
In theory, the law of supply and demand suggests that markets eventually find an equilibrium between the law of demand and supply. This is where quantity and price intercept to find a fair market value.
The equilibrium price is where the quantity of a service or product that producers are willing to supply equals the demand that consumers are willing to buy. In other words, where the supply and demand curve intercepts.
Finding the equilibrium price for your service or product offers a host of advantages including:
- Minimizing waste by producing a supply that matches demand.
- Setting a competitive market price that ensures high revenue and customer satisfaction
- Gaining an edge over competitors
- Maintaining a stable inventory and avoiding surpluses or shortages
The Law of Supply and Demand: Why it Matters for Businesses
Finding a fair market price for any product or service is key to staying competitive in any market. This is why understanding the law of supply and demand is essential for business owners and operators.
The law of supply and demand not only guides businesses in setting prices. It also leads the way when it comes to planning production, hiring, responding quickly to market trends, and understanding consumer rationale.
For example, let’s say your organization launches a new product and prices it much higher than a competitor’s product. This is perceived as similar to yours by the market. In that case, your product might not sell as well, which could in turn mean a surplus of inventory and a monetary loss.
On the other hand, pricing it too low could reduce your profits and inventory significantly. This could mean your business might not be able to meet future demand or innovate and bring new products to market.
How an ERP helps Business Owners manage Supply and Demand
The most convenient way of effectively managing supply and demand in your organization is using an ERP like Xledger. ERP is a type of business software used to manage, track, automate, and integrate core business processes essential to operations
Xledger integrates supply and demand processes like inventory and supply chain management as well as sales and order management. This helps businesses improve product supply, avoid surpluses or shortages, and forecast pricing and demand accurately.
By leveraging ERP software like Xledger, organizations can automate the entire supply and order management process as well as have instant access to real-time data using custom dashboards and analytics. All within one easy-to-use comprehensive solution that connects all aspects of your business in one place.
Curious About What Else ERP Software Can Do For Your Organization?
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