The Fundamentals of Supply and Demand

Supply and demand are the financial framework that serves as the foundation of the consumer economy. It plays a huge role in affecting the procurement functions in a business or an organization. These factors come into play predominantly when you want to launch a new product or a service, but you need to figure out the overall quantity to be produced or the price to be set for that product or service in the market. In such cases, it is the supply and demand relationship that one can analyze to acquire potential profit from that product or service. In simple words, the outlook of any market depends on the demand and supply dynamics.

The Law of Supply and Demand

The law of supply and demand represents a theory that describes the interaction between the supplier of a product or service and the buyer of that product or service. The process of price discovery in the market is represented by the intersection of these curves, which indicates the equilibrium or market-clearing price at which supply and demand are equal or balanced. Other than price variations, other factors impact the supply and demand curves, including taxes, availability of the products, recognition of suppliers in the market, and government policies.

How does the law of supply and demand work?

The law of supply and demand entails the two fundamental economic concepts that illustrate how variations in the cost of a resource, product, or commodity influence its supply and demand. The demand for a product or a service experiences a downfall when the supply increases. In contrast, the supply decreases when the demand increases due to the reduction in the price of products or services. In addition, it states that the relationship between supply and demand governs the prices of various products or services. Levels of supply and demand for different prices can be represented on a graph as curves.

• The law of Supply: The law of supply states that when the price increases, businesses, and organizations increase the supply of the products and services in order to make more profit. Thus, an increase in the price further increases the supply of products and services, as companies see greater opportunity for making money. Thus, the supply of a product or service decreases as the process falls.
• The law of Demand: The law of demand states that when prices increase, the process of purchasing reduces as the customers buy less. In simple words, an increase in the cost of products and services reduces demand due to less purchasing done by the consumers or buyers. To put it simply, the demand for a resource, product, or commodity increases as prices fall.

4 Major Laws of Supply and Demand

The laws of supply and demand forecast four major ways that variations in any of the two components-supply and demand will bring changes in pricing.

• Prices decrease when supply increases, and demand stays unchanged: This law explains that if the supply of a product or a service increases without any changes in its demand might result in an overflow of the product or service. In such cases, organizations reduce the prices of that particular product to boost its demand and increase productivity. It is implemented for many reasons, which include selling excess stocks, particularly if there is an approaching expiration date. Lowering the prices helps in increasing its demand.
• Prices decrease when demand decreases, and supply stays the same: This law explains that a decrease in the demand for a product/goods or service without a change in its supply also creates an overflow of the product or goods. In such cases, prices are reduced by the organizations in an attempt to increase demand.
• Prices increase when demand increases, and supply stays constant: This law states that there can be a shortage of a product or a commodity if its demand increases but the supply remains the same. This results in an increase in the price of the product until supply and demand are balanced.
• Prices increase when supply decreases, and demand remains unchanged: This law describes that insufficiency or shortage of a product or commodity also occurs when the supply decreases, but the demand stays constant. In such situations, customers are ready to pay the increased prices to buy the product or avail service they prefer. In addition, several reasons result in a decreased supply, including supply chain problems. However, as soon as the issues related to the reduction in supply are resolved, prices return to their starting point.

Importance of the Law of Supply and Demand

The law of supply and demand is very important because it enables economists, entrepreneurs, businessmen, and investors to understand better and forecast market situations. The market economy works on the basis of supply and demand as two major components. Moreover, supply and demand serve as the two forces that help organizations determine the selling price and the quantity of product, commodity, or service.

Therefore, supply and demand are an important aspect of procurement that helps you to understand the relationship between them and how it affects the prices of various goods and services. In addition, supply and demand play a huge role in the amount of profit that any organization makes. Moreover, it serves as an economic model that provides the basic information for the consumer economy.

At Procurement Resource, we provide helpful information on supplier relationship management, spend analysis, risk, supply chain intelligence, cost modeling, categories, market research, procurement data analysis, and strategic outsourcing for a wide range of commodities. By assessing our broad range of services, you can help your business enhance suppliers' performance, reduce costs, promote efficiency, and improve the effectiveness of your procurement processes.

Our team of experts will help your organization deeply understand the market and mitigate risks associated with the variations in supply and demand. We assist you in achieving the best value procurement and executing required optimizations for an efficient procurement process. Get in touch with us right now to learn about our innovative strategies and expert analytical recommendations to maximize your procurement strategy.

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