Supply and demand: why markets tick


In 1998, HDTV sets were made available for the first time to lớn American consumers. The pictures were stunning, as were the prices—$5,000 to lớn $15,000 on average. 

Fast-forward 21 years & the average HDTV costs less than $500. What changed?

An oversimplified answer to lớn that question would be supply và demand.

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21 years ago, nobody was mass-producing HDTVs. The first TVs that were available khổng lồ the public carried a huge price tag because the components the manufacturers needed were more expensive sầu than anticipated. So it was hard khổng lồ estimate how much it would cost to lớn make them and how much khổng lồ charge to sell them.

Panasonic released a limited supply of mass-produced sets to lớn a couple of stores on the west coast. One of those stores, Dow Stereo/Video in San Diego, reported that 15,000 people visited the store on the first weekend. Dow’s inventory of 30 sets quickly sold out.

Most of those 15,000 people were curious to see HDTV và didn’t intkết thúc khổng lồ purchase a phối. However, the fact that those first 30 HDTV sets sold out so quickly at a price of $5,500, plus the $1,700 that was charged for the mix top box that was required to receive digital signals, indicated that there was some demand.

As your business seeks to lớn determine the right price point for products and the amount needed lớn satisfy demvà, supply & demvà graphs can help. Read more about how this economic principle works.

Supply and demvà explained

What is supply và demand? Simply defined, supply và demvà says that prices are low when there are plenty of products available for purchase. When supplies are scarce, prices are driven up, & dem& decreases.

So the law of supply & dem& can be summed up as the relationship between demand for a sản phẩm or service, the supply of that product or service, and the price that consumers are willing to pay.

What is a dem& curve?

To underst& what a demvà curve is, you’ll need lớn underst& the law of demvà. 

Demvà explains how a market is driven by consumers, who base their decisions mainly on how much money they make and whether they can find a similar sản phẩm at a lower price. At lower prices, consumers purchase more products. When the price increases, the expectation is that consumers will purchase fewer items or will seek out similar, less expensive sầu products as a substitute.

In 1998, the HDTV supply was very limited. The demand was also limited as it was mostly driven by early adopters who had the means khổng lồ pay thousands of dollars for a trang chủ entertainment system. However, because the limited supply sold out quickly, more manufacturers were eager lớn produce their own versions of HDTVs lớn try khổng lồ grab a tóm tắt of the market. More product eventually led to lower prices & higher consumer dem&.

So what does a demvà curve illustrate? A demvà curve sầu is the visual representation of the law of dem&. The following example is an oversimplification of the relationship between the supply, demand, & the price of the first HDTVs in 1998.


Demvà curve example: In this example, a store was able lớn sell 30 HDTVs in a week at a price of $5,500. In an effort khổng lồ sell more sets the next week, the store offered a $500 discount & was able to sell 60 sets.

What is a supply curve?

If dem& is driven by consumers, then the law of supply is driven by manufacturers and sellers và their desire lớn make money. The supply is the amount of hàng hóa that manufacturers are willing khổng lồ make available lớn sellers, và the amount that sellers are willing lớn make available khổng lồ the consumer at a particular price during a specified time frame. 

Today, you can buy larger flatscreen TVs with superior picture chất lượng than those from 1998 for approximately $500 or less. This is possible because there are more players in the game, production costs have come down, and manufacturing is more efficient. These circumstances have sầu made it much easier lớn get more sản phẩm lớn the consumer.

Suppliers have khổng lồ be careful not lớn supply too much product so the market does not become saturated. As prices go down, that cuts into lớn profits. Also, lower prices can have a negative impact as consumers perceive less expensive sầu items as being cheaply made and of low quality.

The supply curve is the visual representation of the law of supply. The following supply curve sầu graph tracks the relationship between supply, demand, & the price of modern-day HDTVs.

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Supply curve sầu example: In this example, 50-inch HDTVs are being sold for $475. As demvà increases for these particular models, the manufacturer supplies more to lớn the seller to lớn meet the dem&. The seller increases the price lớn $500 to make more money while demvà remains high. When prices are raised again, the dem& will cấp độ off and may start to wane, leading lớn a supply surplus.

Supply và demand equilibrium

When we put the demvà & supply graphs together, the curves will intersect. This intersection is used lớn determine the equilibrium price. The equilibrium price represents the point where the supply of a product is equal to lớn the dem& for that product.

The example supply & demand equilibrium graph below identifies the price point where sản phẩm supply at a price consumers are willing to lớn pay are equal, keeping supply and demvà steady.


Supply curve example: In this example, the lines from the supply curve sầu và the demand curve indicate that the equilibrium price for 50-inch HDTVs is $500. Prices too high above sầu $500 can decrease demvà và lead khổng lồ a sản phẩm surplus. Prices too far below $500 can increase demvà & lead to lớn a hàng hóa shortage.

You want to lớn keep your sản phẩm supply & price points as close khổng lồ the equilibrium as possible to avoid a surplus or shortage of goods. 

A surplus occurs when the price is mix too high. This cuts into profits as dem& decreases & consumers stop buying your sản phẩm. Some people will look for substitutes or cheaper alternatives khổng lồ your product or just stop buying them completely. Sellers try khổng lồ eliminate the surplus by reducing prices to entice consumers lớn start buying again.

A shortage can occur when dem& outpaces supply, which occurs when the price is set too low. Manufacturers may have a hard time producing enough product to lớn keep up with demvà. However, a shortage will drive sầu up the price as consumers compete to buy the sản phẩm. Sometimes manufacturers will deliberately hold baông xã the sản phẩm to lớn create dem& so prices can be raised.

Price elasticity

Not all products behave the same way to supply và demvà fluctuations. Some products are more sensitive to lớn price changes than others.

For example, everybody toàn thân needs to lớn eat khổng lồ live sầu. An early freeze or drought conditions might drive up food prices, but people are still going lớn buy food. They may not buy as much as they normally would, or they might opt for cheaper, lower chất lượng alternatives, but they are still going to lớn buy groceries.

On the other hvà, if the cost of the components needed to lớn make HDTVs rises & causes TV prices lớn rise beyond what people are willing to pay, chances are they won’t be running out lớn buy a new TV.

The effect that demvà has on the phối price is known as the product’s price elasticity. If a product’s change in price causes substantial changes in dem& và supply, that sản phẩm is elastic. If a product’s price changes don’t have sầu that much of an effect on dem&, that sản phẩm is known as inelastic.

In our examples above sầu, essential live-sustaining foods are inelastic because people have sầu khổng lồ eat if they want to stay alive sầu. They may skip the candy and cookies, but they will always buy the items they need lớn live.

When the price of luxury or nonessential items such as HDTVs rise too much, it has a big effect on the demand as consumers decide to wait to lớn buy a new mix or decide not lớn buy a new TV at all. Home electronics are nice lớn have sầu, but they are very elastic products because we don’t need to buy them, và it’s very likely that nobody toàn thân has died yet from not watching enough TV.

Get started on a supply và dem& graph

Product prices are determined by consumer demand và the amount of goods suppliers are willing lớn make available. Where the two curves meet helps you khổng lồ determine the equilibrium price that balances the supply and demand. Use khổng lồ make supply và dem& graphs so you can make better pricing decisions faster.

When you underst& the relationship between the demand, supply, và equilibrium price, you can more effectively analyze the market you work in or want to break into lớn. The analysis helps you to lớn allocate resources and be more cost-effective.

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