Supply and Demand
Supply and demand is taught in schools as one of the most basic economic concepts. As soon as children can learn about currency and its relation to goods and services, they are next taught the demands of the market. These demands completely control the supply of goods and services that companies and corporations create on a massive scale. The matriarch and patriarch of the international marketplace, supply and demand are the controlling factors of almost everything in modernized society. The two concepts seem simple to understand and gauge based on the current status of the markets, but they run deeper than almost any other historical and commerce related desire.
Rather than a simple indicator of what companies should sell, supply and demand actually act as a numerical price indicator for everything that can be bought. The in depth, college level subject runs on the foundation of four basic rules.
- If demand increases and supply remains unchanged, then it leads to higher equilibrium price and higher quantity.
This rule explains that once a company or group of companies make the maximum supply of a product based on manufacturing variables, they can no longer increase production. Using the word equilibrium to describe the average status of most companies, this part of the rule explains that the value of the maximum amount of products will increase if the demand continues to do the same. To create an example, if all fast food consumers began to eat nothing but French fries, the restaurants would begin to exclusively create and serve French fries and nothing else. If the demand then continued to increase, the restaurants couldn’t suddenly make French fries that come from thin air, they can only increase the price of a fry until the demand eventually slows. This will maximize profit and keep the demand of the customers as a neutral and controllable level. This is a very unlikely situation, and the example serves specifically to show the impact of an increased demand.
- If demand decreases and supply remains unchanged, then it leads to lower equilibrium price and lower quantity.
This is essentially the opposite of the first rule, and, to follow the first example, would result in less production of French fries. The example restaurant would begin to serve more burgers and chicken, while lessening the amount of fries. The price of fries would drop to try to keep them on the menu, but if the demand did continue to slow, they would eventually be taken off of the menu completely.
- If demand remains unchanged and supply increases, then it leads to lower equilibrium price and higher quantity.
This is the most basic of the four rules. If the previously mentioned example restaurant suddenly received an order of fries twice the size of the ordinary ones, they would try to increase the purchases of fries by decreasing the price, and therefore their value. The higher quantity of fries in this situation is therefore self-explanatory.
- If demand remains unchanged and supply decreases, then it leads to higher equilibrium price and lower quantity.
The last of the rules and most similar to the third, the fourth states that a decrease in product would result in an increase in price. If a strange potato disease were to wipe out half of the French fry shipment, the restaurant would receive less sellable French fries (lower quantity.) To attempt to recoup their losses, they would raise their prices on average to attempt to make up for the loss. This would continue until the unchanged demand eventually began to fall due to the overwhelming expense.
These four instances, or rules, are commonly occurring. They mix with one another, making the financial equations far more complex than the sale of French fries at fast food restaurants. With the overwhelmingly large variety of products, services, and needs that eventually equal out to demands, the economic concepts run far deeper into the veins of international commerce. Economists have put together a chart, representative of the asymptotes of supply, price and demand, which correlate to every single type of business. With the correct variables and factors, this chart can tell a business owner exactly what how much to sell and what to charge for the product in order to get the most money out of the consumers. Business owners use supply and demand as the complete determinates of sales.