The law of supply and demand

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:42

There are insanely many different entrepreneurs in the world who are engaged in completely different types of activities. How do they manage to keep their business and what laws do they follow? The laws of the market, the law of demand and other factors in the development of the organization are our topic today. This article will discuss a very important law, the observance of which helps entrepreneurs stay afloat.

Demand details

The law of demand, which is actively used by many organizations, does not seem so complicated at first glance. It all depends on the price of products, it sets all the conditions for supply and demand. So, we have come to the very law of supply and demand. It lies in the fact that the lower the price of a product, the lower the supply and the higher the demand for it. However, quite often it can be noted that the modern economy does not imply such a strong dependence of all these concepts on each other.

Let's take an example: the price is going down, but the demand is still not up or has gone up byminor level. Meanwhile, the proposal does not change its activity at all. Or another example: prices rise, but demand remains the same. Thus, in the economic world, such a concept as the elasticity of supply and demand was introduced. It shows how supply and demand adapt to market conditions.

Besides, with the introduction of new concepts, the appearance of exceptions is quite natural. Sometimes such exceptions show completely uncharacteristic results for the current economy. For example, a product is in active demand, but who would have thought that this indicator is associated with a constant increase in prices? Or, conversely, when prices decrease, the volume of these products on the market increases.

What is the reason for such an unexpected reaction? Below are some examples of what causes such situations. Speaking of elasticity, every entrepreneur and businessman needs to remember that he will be able to remain competitive only by properly studying the elasticity of his products. This also applies to marketers. These people need to know absolutely everything their consumer needs. And also understand such concepts as the laws of the market, the law of demand and the law of supply.

Demand examples

Let's figure out what demand means. This is an economic concept that implies a certain amount of products that consumers want in the market at a certain point in time and under specific conditions.

It is the essence and importance of the product, as well asthe solvency of the consumer determines the demand. Everyone who is involved in the economic sphere or runs a business needs to correctly understand what exactly demand means and how it affects the company's activities.

Demand can cover not only the product itself, which has already been bought, but also the need for it. Thus, even if sales transactions were not completed, demand may still be present, because to some extent this product is needed by a certain number of buyers.

Demand Activity

There is such a thing as demand activity. It is influenced by several factors: the moment, the month, the week, the day, and even the year. In other words, it's seasonal. Activity is also affected by certain characteristics of products, food, electricity, fuel for the transport used, clothing, household appliances and many others.

That is, with a certain event - a decrease in prices - there is an increase in demand for goods, according to the law described earlier. It is important to note that in this law it is quite easy to make an analysis of the income of the buyer. If the price is two times less, the goods can be bought twice as much, respectively. As already mentioned, in the economic sphere, in practice, the basic concepts of the law of demand are often violated, thereby creating more and more new types of exceptions. Here are a few examples:

Increasing the price of a good sometimes may not reduce the demand for it at all. On the contrary, even stimulate. This happens when prices rise in the market. And all because the buyerexpects prices to rise as much as possible and rushes to snap up products while they still have the “extremely adequate” price. However, this phenomenon could easily work in the other direction as well.
If the price of a product goes down, it can easily lose its sales activity. In addition, demand will continue to decline even after a given situation. Why is this happening? The law of demand for goods assumes that it is impossible to reduce the price of a product if it is the main indicator of quality, necessity and demand. An easy example would be gold - if you constantly wait for the price of gold to fall, the need for gold may disappear.
Let's also take precious metals and stones, branded perfumes and so on as an example. If you reduce the cost, they will certainly lose their required sales volume, and demand and sales will also decrease. The exception is that when the buyer has a significant increase in income, he no longer needs to buy these things. Thus, even such expensive products may have no competition against each other at all, because they depend on the consumer.

Elasticity in demand

Elasticity of demand is a response to changes in some demand factors. This concept was introduced into the economic sphere by the famous French philosopher, but above all the economist and mathematician, Antoine Augustin Cournot. He made analyzes on various models regarding the interaction of demand and prices. He decided to note the important thing that with significant changes in pricing policy, demand is practically notsuffers, except that there are completely imperceptible fluctuations.

For example, a violin and an astronomer's telescope are currently quite expensive. But is it worth cutting the price in half, say, if this does not increase the sale of the violin or this telescope at all? Unless quite a bit, some will still need to buy the listed things. The law of demand, demand, demand factors - all this directly affects the above examples.

As an opposite, firewood is an easy example. Firewood is a critically needed material for all of us. If you raise the price by two or even three times, the sale of wood will not decrease at all. Yes, prices for wooden products will be much higher, but this is the product that buyers need. Thus, we see that products can be considered luxury or belong to essential goods. Of course, since Cournot, other properties have been found that may or may not affect the demand for a good. Here are two examples.

Substitute product. We often turn to various forums in an attempt to replace the flour or butter that has run out. Do you have semolina and margarine? Great, you've found a replacement for flour and butter. This leads to the appearance of elasticity of this product.
But we cannot replace such products as s alt, tobacco, drinking water. In this case, the product completely excludes the presence of elasticity.

One can well conclude that a product may or may not be elastic, that the price does not always affect demand, and that sales willbe directly dependent on demand.

Expenses at the consumer

In this question, we again meet with the concept of elasticity. But now we will talk about the relationship of this indicator with consumer spending.

Some products require large deposits, that is, large expenses on the part of the buyer. In this case, demand will not be elastic. In a situation where demand is elastic, the consumer will not experience too much spending.

The market law of demand suggests that if the product is cheap, then demand is elastic, if not, it is not elastic.

In general, the income of the buyer can reduce the activity of sales of insignificant goods. Yes, the volume of goods is decreasing, but so is the income of the buyer.

Product profile

The purpose of the product can be different - it can satisfy the needs of buyers, which is directly reflected in demand, or it can happen vice versa. Let's take the simplest example: some medicines are in high demand due to their high cost. As soon as the price falls, the demand will drop sharply, since the demand for it will no longer be so high. Such factors are often displayed on the products that are used for industrial purposes. The magnitude of demand, demand, the law of demand - these are the reasons for these factors.

Modern industrial organizations are actively studying the elasticity of demand. This helps them to choose the right benchmark in their market. They need to have information about what products to produce, exactly how much, when and at what time. Naturally, the business cannot do without marketers, whose task is to actively disseminate information about the products that have been released. However, a common mistake many marketers make is to try to make demand for an advertising product inelastic.

Exceptions to the law of sentences

In the economic sphere, there is an additional concept - the offer. Let's discuss what it is.

Supply is a certain amount of goods that sellers want to sell in a particular market in a certain period under certain conditions. However, the offer cannot concern a product that was not produced for the purpose of sale.

Let's say a farmer, producing a certain amount of products, can keep some of it for himself. This will not be considered an offer. And in the event that another part of its products goes to the market - to sell - this will be an offer. The law of demand expresses that the volume of supply always depends on time and the current moment, some period of time.

The offer is currently made up of goods in stock. And longer periods of time include goods whose production or removal from warehouses is directed to sale. The main source of supply is production, and the most important factor is, of course, price.

For example, there may be a price at which the finished product is not offered, but is in stock until a better price is set. The law of supply and demand states that an increase in the price of a product increases supply, andlow prices, on the contrary, lead to its decrease. This stable relationship reflects the impact of the cost of goods on their supply. But like the law of demand, the law of supply also has exceptions.

Let's take monopsony for the best example (this is when there is one consumer among many sellers on the market), in this case we see increased competition among sellers and at the same time low prices. At such times, sellers try to compensate for low prices with high sales volumes. It is also necessary to note the criteria that affect the growth of commodity volume. This is a factor of the available resources that are needed to produce the goods offered. With an increase in the price of products, but the lack of resources for its production, volumes can rapidly fall. The law of demand, demand, demand curve affect volumes as well.

For example, after bad weather, crops of apricots disappear. The price goes up, but there are practically no offers. And all because the technology of production of these apricots also affects the activity of supply and demand. For example, offshore cargo tankers have relatively high production costs and are produced individually, while ballpoint pens have low production costs, which means they are produced in large quantities.

Elasticity of supply

We have already talked about the elasticity of supply, but let's look at what it is in more detail.

Elasticity of supply is a change in the number of offers depending on the factors that are on this offeraffect.

Let's say a large amount of a certain product is an indicator of supply elasticity and vice versa - a small amount indicates low elasticity.

High production costs indicate a weak elasticity of the produced goods. The important thing is that high production costs of products provide an opportunity to enter the market of other goods with the use of new products that help reduce costs in the production of the same goods.

The transport system also plays an important role in determining supply elasticity.

Producer and customer response

The factor of some periods also indicates the elasticity of supply. Any supply is inelastic in a period that is short-term. Producers always react to price changes much more slowly than buyers. Everyone knows that products that spoil quickly are sometimes sold even below cost. This is because if they are not sold, entrepreneurship will suffer somewhat more damage.

But the response to a change in supply is much slower than to demand. A very important feature here is that entrepreneurs who quickly respond to price changes have a much greater advantage over others.

About demand in general

Thus, every enterprise has the very factor that drives it forward and helps to develop. Most often, this factor is the product, its features, unusualness or quality.

However, it is important to remember the maineconomic criteria that must be met in order for the organization not only to have a good reputation, but also to be competitive.