Exploring the Law of Supply and Demand and How it Affects Businesses

Launching a new product can be tricky. You must figure out how much to produce and what price to charge. If you get it wrong, you could end up with too much product that nobody wants or insufficient to meet the demand.

That’s where the law of supply and demand comes in. It’s all about finding the right balance between what you have, what people want, and what they’re willing to pay. Understanding this law helps businesses make smart decisions to keep customers happy and profits healthy. 

In this blog, we’ll explore how grasping the law of supply and demand can transform your business decisions.

Law of Supply and Demand: Understanding the Basics

To gain a comprehensive understanding of the law of supply and demand, let’s take a look at its basics:

Supply and Demand Relationship

• Supply and demand is about how much of a product sellers want to sell at different prices and how much buyers are willing to purchase.
• When there’s too much supply, prices usually go down. For example, if there are too many oranges in the market, their price might drop.
• On the other hand, when demand is high and supply is low, prices tend to rise. Think of concert tickets- their prices go up when they’re in high demand but limited supply.
• This balance between supply and demand determines the equilibrium price, where both sides are satisfied.
• The equilibrium price is the point where supply and demand are balanced, ensuring that all goods are sold at a price agreeable to both buyers and sellers.

Primary Factors Affecting Supply and Demand

Various factors influence supply and demand. For supply, the availability of raw materials and production costs play a significant role. Meanwhile, consumer income and commodity prices greatly impact demand. These factors are explained below for your better understanding.

• Availability of Raw Materials: If inexpensive raw materials are widely available in the market, this will increase goods production, causing an increase in product supply. On the other hand, if inexpensive raw materials are scarce, this will decrease goods production, which will decrease supply.
• Production Costs: Production costs include manufacturing expenses like raw material costs, employee wages, and utility charges. When production costs rise, companies tend to make less profits, leading to a decrease in supply. Whereas, if production costs fall, firms will make higher profits, resulting in an increase in supply.
• Consumer Income: If consumer income decreases, so does their purchasing power and demand for the product. However, if their income increases, their purchasing power rises, leading to demand growth.  
• Commodity Price: With an increase in the price of a commodity, its demand usually decreases. Alternatively, with the decrease in commodity price, its demand usually increases.  

Equilibrium: Where Supply Meets Demand

Equilibrium is when the supply and demand for goods or services in the market are equal or almost equal, resulting in a stable price. Usually, this occurs due to the oversupply of commodities, which causes prices to fall, resulting in higher demand.

Conversely, it can also occur when there is an undersupply of goods, leading to higher prices and lower demand. 

The Role of Price in Supply and Demand

By now, it is clear to you that the price of a commodity plays a major role in the law of demand and supply. However, supply and demand for a commodity do not necessarily respond proportionately to price movements.

Price elasticity is the extent to which price changes can impact the supply and demand for a commodity.

Price Elasticity of Demand

Price elasticity of demand is the percentage change in the demand for a particular good or service divided by the percentage change in its price.

Price Elasticity of Supply

Price elasticity of supply is the percentage change in the supply of a particular good or service divided by the percentage change in its price. 

Market Forces and Price Fluctuations

There are several market forces that can have a profound impact on the supply and demand of goods and services in the entire economy. They are:

• Government regulations
• Micro and macroeconomic events
• Technological advancements
• Social and cultural changes
• Demographic trends
• Competition  

These market forces can influence the supply of goods and services by influencing their prices. This, in turn, can affect companies’ profitability within a particular industry.

Exploring the Impact of Supply and Demand on Businesses

As you now know, how supply and demand can impact the profitability of businesses, it is time to explore how you can mitigate them:

Strategies to Adapt to Changes in Supply and Demand

Flexible Marketing Techniques

Developing flexible marketing strategies will enable companies to react quickly to shifting consumer preferences, allowing them to direct the trend in their favour. 

Data-Driven Insights

By leveraging data analytics solutions, businesses can exploit consumer data to its full potential and gain data-driven insights into purchasing habits, consumer preferences, and market conditions.

This, in turn, can help them adjust to the needs of their target market, thus increasing the chances of making profits.      

Agile Inventory Management

Agile inventory management involves streamlining a company’s supply chain to quickly adapt to changes in customer demand. It aims to balance supply and demand to avoid overstocking or stockouts and ensure that all resources are efficiently utilised.   

Diversifying Offerings

Having a wide range of products and services is an excellent way to cater to different customer preferences and target various consumer segments. It will significantly reduce the risk of fluctuating demand while acting as an additional income source for businesses. 

Risk Management in a Supply and Demand-Driven Market

Adopting risk management techniques is crucial to maintaining profitable business operations in a supply-and-demand-driven market. These techniques can also prevent delays and disruptions across the supply chain, safeguard corporate reputation, and facilitate accurate budgeting and financial forecasting. 

Working of Law of Supply and Demand in Different Industries

Following is an analysis of how the law of supply and demand works across various industries:

Supply and Demand in the Retail Industry

In the retail industry, prices go up when more people want something, but there’s no increase in supply (like when everyone wants the latest phone). But prices drop if fewer people want it, and there’s still plenty around (like when last season’s gadgets were still on the shelves).

In the same way, prices fall if there’s suddenly more production (e.g., a surplus of bananas) and nobody’s buying extra. Yet prices shoot up if there’s suddenly less of something everyone still wants (e.g., a drought and fewer strawberries). It’s all about balancing supply and demand in setting commodity prices.

Supply and Demand in the Transportation Industry

In the transportation industry, supply and demand work together, but not always equally. Demand for transportation depends on available supply, meaning if there’s no supply, there’s no demand. However, supply can exist even if there’s no immediate demand for transportation services.

Supply and Demand in the Manufacturing Industry

In the manufacturing industry, if demand exceeds supply, it leads to lost sales opportunities and understocking. Whereas supply exceeds demand, it leads to excessive inventory costs and overstocking. 

The Future of Supply and Demand

Here are some future trends that can impact supply and demand:

Technological Advancements and Its Effect on Supply and Demand

Technological advancements can effectively lower production costs and increase output. One classic example is the impact of automation and robotics in manufacturing. Additionally, innovations like smartphones and tablets have created entirely new markets, increasing demand for related products and services, thus affecting supply and demand.

These practices enable businesses to manufacture goods at a lower price, increasing their profits. Thus, they are willing to produce more, increasing the overall market supply. Additionally, technological advancements can stir consumer interest, causing a rise in demand.

The Impact of Globalisation on Supply and Demand

Globalisation enables consumers to avail themselves of cheaper commodities from countries with higher technology usage or low labour costs. Thus, with increasing globalisation, the supply of goods and services will rise in the market, causing a fall in prices. 

Future Market Trends in Supply and Demand

Anticipating supply and demand entails predicting future market trends and taking measures to deal with them.

Businesses can respond to such changes by performing customer data analysis to predict market trends and fluctuations, improve efficiency, identify potential risks, and take the necessary steps to mitigate them.

Understanding the law of supply and demand can enable you to analyse the market with its trends and optimise your business’s supply chain. However, this also includes making your business adaptable and efficient so that you can respond quickly to fluctuations in market demand.  

For this, teaming up with a reliable logistics partner is a must.

Explore Porter Enterprise! 

With our seamless logistics network across 20 cities in India, you can effortlessly navigate your business needs. We’ve got you covered, whether it’s FMCG, medical supplies, agricultural goods, or electronics.

Partner With Porter Enterprise

Frequently Asked Questions About the Law of Supply and Demand

1. What happens when supply exceeds demand?

When supply exceeds demand, there is more availability of goods in the market than demand. This influences businesses to sell their products at a lower price, resulting in a fall in commodity value. 

2. How does the law of supply and demand affect pricing in a competitive market?

In a competitive market, prices of goods and services will adjust until they reach a point where the quantity demanded will equal the supply. 

3. How is the law of supply and demand related to inflation?

If the aggregate supply of goods and services falls but the aggregate demand remains the same, this causes upward pressure on prices, resulting in inflation.

4. Can supply and demand be manipulated?

Yes, supply and demand can be manipulated using marketing techniques and spreading misleading information, which can create a temporary increase/decrease in demand for goods or services that can profoundly impact their supply and, as a result, their prices.