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Demand and Supply

What is Demand and supply?

Supply and demand are economic are the economic forces of the free market that control what suppliers are willing to produce and what consumers are willing and able to purchase. The term supply refers to how much of a certain product, item, commodity, or service suppliers are willing to make available at a particular price. Demand refers to how much of that product, item, commodity, or service consumers are willing and able to purchase at a particular price.

In other words, supply pertains to how much the producers of a product or service are willing to produce and can provide to the market with limited amount of resources available. Whereas, demand is how much of that product or service the buyers desire to have from the market.

Law of Supply and Demand

Demand and supply play a key role in setting price of a particular product in the market economy. Since demands of buyers are endless, not all that is demanded can be supplied due to scarcity of resources. This is where the relationship of demand and supply plays a significant role, allowing efficient allocation of resources and determining a market price for the product or service, known as equilibrium price. This price reflects the price at which suppliers are willing to supply and the buyers are willing to buy from the market. The mechanism of determining market price through demand and supply can be better understood by observing the market economic theories.

Factors that affect demand and supply

Supply and demand work like a seesaw in some ways, always responding to market pressures.

Price Fluctuations

Price fluctuations are a strong factor affecting supply and demand. When a product gets expensive enough that the average consumer no longer feels it is worth it to buy the product, then the demand declines. This leads to cuts in production that will hopefully stabilize the product’s value. Lowering the price of a product may increase demand, indicating that the public feels the product is suddenly a great value. This may also cause changes in production to increase to keep up with the demand.

Income and Credit

Changes in income level and credit availability can affect supply and demand in a major way. The housing market is a prime example of this type of impact. During a recession when there are fewer jobs available and there is less money to spend, the price of homes tends to drop. Also, the availability of credit may be less because of the average person’s inability to qualify for a loan. To help encourage those who can afford to buy, prices fall which can boost sales, and even more so if interest rates decrease. When there is an economic boom, unemployment is very low and people are spending money readily, the price of homes and other major purchases tends to rise and so do interest rates.

Availability of Alternatives or Competition

When an alternative product hits the market, the competition between the existing product and the new one can cause demand to drop for the existing product. Just as many people may be buying the product, a large portion of them may elect to buy the alternative brand. This leads to price wars that ultimately lower the price of the product and may require a cut in supply to fall in line with the decrease in demand.

Trends

Demand rises and falls on trends in many cases. Only a few things remain a constant need for society. Even food and shelter aren’t immune to the effects of changing trends. If widespread media attention is given to the idea that eating bean sprouts is bad for you, then eventually it will affect the demand for bean sprouts. When the attention is focused on something else, the bean sprout market might rebound.

Commercial Advertising

Commercials on television, internet and radio have an effect on supply and demand in that they make more people aware of the availability of a product. People do not buy what they don’t know is for sale. If it is an appealing ad, there is a good chance demand will increase and supply will have to follow suit.

Seasons

The seasons can affect supply and demand drastically. The supply and demand for toys peaks around Christmas and turkeys sell like crazy at Thanksgiving. Fireworks experience a boom at the Fourth of July in America. Meanwhile, it’s difficult to increase demand for bikinis in January in Minnesota.

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CA Divya Thakkarhttps://www.financeshadow.com
Chartered accountant | IIM Bangalore 7+years of experience in Consultancy, Investment Banking, Ecommerce & IT Industry. Expert in IFRS, USGAAP, INDAS & US Regulatory requirement. Currently working with Deloitte Touche & Company in Risk ,Finance & Control advisory. Worked in Companies like Barclays Bank, HCL Technologies Ltd & BazaarCart.

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