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Supply and demand are fundamental to our economy and the markets your small business operates in. Understanding these forces may feel insignificant at times, but doing so can help you make better business decisions, from pricing your products to predicting future market trends. Read on to find out more.
What is supply and demand?
In its most basic form, supply and demand is the concept used to outline the combination of these two market forces.
Supply refers to the quantity of a good or service that producers are willing and able to offer for sale at various price points. Demand, on the other hand, refers to the quantity of a good or service that consumers are willing and able to buy at various prices.
Together, these forces determine the expected market price and quantity of goods or services to be sold. Bit confused? Let’s bring in some real-world examples.
Why supply and demand matter for your business
The better you can anticipate the forces of supply and demand, the better you’ll be able to capitalise on them when the time is right. Monitoring trends can also help you avoid pitfalls and make better decisions.
For example, if demand for your product is high but the supply from you and your competitors is low, you should be able to raise prices and increase profitability without deterring too many buyers. Similarly, if there’s a surplus of products on the market but demand is weak, lowering prices may be necessary to attract buyers.
Consider a scenario where you’re selling seasonal items. If demand spikes, say in the build-up to Christmas for holiday decorations, but you’ve ordered too little stock, you risk missing out on sales. If you’ve over-ordered and demand is lower than expected, you’ll have excess inventory which could force discounted pricing, lower margins and even losses.
External factors influencing supply and demand
Many external factors can impact supply and demand, including government regulations, global events and shifts in consumer preferences.
You see these factors and forces at play clearly in the global commodity trading market. Raw materials such as oil, metals and agricultural products are particularly susceptible.
For example, oil prices often fluctuate due to geopolitical tensions (like we’ve seen since the war in Ukraine started) or production decisions made by major oil-exporting countries. Agricultural products like oils and grains can be affected by weather conditions, trade policies and crop yields, which in turn influence their supply levels and prices.
Other factors such as Brexit have introduced trade barriers for many importers and exporters, impacting the supply and competitiveness of certain goods in UK and EU markets.
Use supply and demand to your advantage
Understanding and applying this concept can help make your business more competitive. Use the knowledge you’ve gained here to better position your products, anticipate customer behaviour and make strategic decisions to help you achieve long-term success.
