Join Eddie Davila for an in-depth discussion in this video Supply and demand, part of Business Foundations.
- Supply and Demand, it's perhaps one of the most basic concepts in the world of economics. So what does it mean? What does it explain and why is it important in understanding business? Supply and Demand helps us explain prices companies charge, prices customers will pay and the amount of product that is produced and ultimately bought. Essentially it tells us that in a competitive market where multiple companies have the capability of satisfying a customer, suppliers will create enough product to meet consumer demand at a certain price.
For example, if my company knows that customers are willing to buy computers at $1,000 then my company will produce enough computers to meet that demand. Now if we miscalculate and make too many computers we may sell some computers at a $1,000 but we'll be left with too many computers. Thus, we may have to decrease the price of the computers since some customers may not be interested at $1,000 but they might be willing to buy at $750.
On the other hand, if we don't make enough computers, we will sell all the computers for $1,000. When we and our competitors discover that more people want $1,000 computers, we will likely scramble to make more computers and we may even be tempted to raise the price. So as we can see, when supply exceeds demand, prices will likely go down. On the other hand, when demand exceeds supply, prices might go up.
Consumers react to prices and available supply. We can also see how this might impact suppliers. When supply exceeds demand, there are too many computers out there and prices are going down. Some computer suppliers might be tempted to leave the computer industry. On the other hand, if your company sells all of its computers at $1,000 and lots of customers walk away unhappy without computers, lots of other companies may see the shortage in supply as an opportunity for them to make computers to fill the unfilled demand.
What does all of this mean to a business person that is reading the news? Well, if you see that Saudi Arabia is going to decrease the amount of oil they produce, the global oil supply is going to go down. When there's less oil, prices are likely to go up. What happens if you read that great weather is going to produce the best crop of corn in decades? Lots of corn means very high supply. When there's too much corn customers can get it anywhere.
There's only so much corn they can eat. So corn sellers will need to sell corn at a low price. How about if you hear that because of a new movie lots of people now want to start riding bicycles? The demand for bicycles is going way up. Bicycle companies can't produce enough bikes fast enough to meet demand. This may mean that retailers short on bicycles may see an opportunity to raise bicycle prices. At the same time when bicycle sales skyrocket, lots of new bicycle manufacturers may start to pop up and bicycle companies already in existence will probably expand their output.
More bicycles are going to be available in the future. Increased supply in the future will mean bicycle prices are likely to come back down. Supply and demand is a rather simple concept. And a business person that understands even the most basic supply and demand elements, will be able to explain what has happened, what is happening right now and perhaps they can also guess at what might happen next.
He also reviews the basics of the people side of business: managing employees and developing customer relationships. Last, he covers the financial and information management aspects of business and provides a basic explanation of economics, so that you can understand the relationship of your business to the bigger picture.
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- Understanding business goals, stakeholders, and resources
- Developing a product or service
- Selling a product or service
- Raising capital
- Managing employees
- Managing customer data
- Understanding finances
- Managing resources
- Understanding economics