Posted by: Matthew Molinari | June 7, 2012

Supply & Demand

I just saw that global sugar prices dropped due to a surplus and it made me think about the basic rules of supply and demand. I thought I would give just a quick refresher for those of you who may not be up on your economic theories. We hear about supply and demand almost everyday and I think a lot of it just goes in one ear and out the other. Really understanding how supply and demand influence the price you can charge for your product is key to long-term success in your industry. The basic idea is that as supply increases the price customers are willing to pay will decrease.

 The opposite is also true – as consumers start to see a good become more difficult to obtain, as supply into the market decreases, the price can be raised because they are willing to pay a higher price. This is why most goods fluctuate in pricing throughout the year.

The relationship is self-correcting however so with any normal good you should see it fluctuate evenly over a given time period. As demand increases and the available quantity decreases, the price will rise until the demand starts to decrease again.

This is true because people operate on a fixed income so as they are forced to spend more on certain items they must choose other items to cut back on. Eventually, the shortage will create a price high enough that demand drops and slowly the price will move back down towards the equilibrium where demand is equal to supply.

As this happens, people notice the price dropping and once again the demand picks up and the cycle starts again. You can plan for a lot of different things in your business but the supply of materials coming in and demand for your product is one of the most difficult. There are so many factors that go into the demand levels that it is very hard to predict with any certainty.

I hope this helped (in case your economics was just a little rusty) and maybe you can provide some insights on how your company deals with market flucuations for your product line.

 

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