Supply and demand is one of the most important parts of economics and it is the backbone of any market economy. Demand refers to the quantity of a product or service that is desired by buyers. The quantity demanded is the amount of a product people are willing to buy at a certain price, the relationship between price and quantity demanded is known as the demand relationship. Supply represents how much the market can offer. The quantity supplied refers to the amount of a certain good producers are willing to supply when receiving a certain price. The correlation between price and how much of a good or service is supplied to the market is known as the supply relationship.
Without a market, you have no supply or demand, and, therefore, no business at all, because there’s no one to sell anything to. Therefore, the first factor a business should consider in the supply and demand arena is whether there is indeed a market of buyers who want a particular item and sellers who want to sell it to them. With many buyers and sellers in a competitive market, each has little effect on the price, allowing it to be driven by overall sentiment.
The supply side of the theory refers to how much of a product a business owner can supply to buyers and at what price. There’s no justification for pricing an item artificially low if he doesn’t have the manufacturing output to keep up with a spike in demand of people who want to get it at the low price. The exception is if his tactic is simply designed to draw attention to his business, hoping to make enough of a splash that sellers will return for more of the product at a higher price later on.
The law of demand states that, all other factors being equal, demand will be reduced as the price of a product is raised. It falls to the business owner to find the pricing sweet spot that will capture as much of a profit as possible without causing demand to retract. When the ultimate goal is to be profitable, a close and continual analysis of the supply and demand of every product line is essential to staying competitive in the market.
Supply and demand can have many effects on businesses some of this can be positive, however some of them can also be negative. For example in May 2017 BMW was unable to complete the building of thousands of luxury cars because of production problems. A shortage of steering systems from Bosch, the world’s largest supplier of car parts, was the cause of the disruption. Car manufacturing is complex and BMW typically relies on “just-in-time” production, meaning that it only orders parts when it needs them.