Or How Low Will They Go?
Supply and demand are at the very core of a capitalistic economy. Quick-thinking, forward-moving entrepreneurs recognize consumer’s demands, and compete for the right to supply the goods required to satisfy these demands. This is an excellent way to do business. Consumers can acquire the goods they want, and need, from suppliers, and businesses can earn profits by supplying consumer demands. Once an entrepreneur has recognized a need, and developed a product to satisfy this new demand, cost is the only remaining factor needed for a successful meeting of supply and demand. By following a few simple theories in supply and demand, entrepreneurs can determine the best market price for their product.
Our fictitious company has decided to supply the demand for Nothing. Nobody else is supplying Nothing, and since our Nothing is like nothing you have ever seen before, it is sure to be a huge success. Because our company is in business to make money, we want to supply our Nothing at the highest possible price. Unfortunately, few of our consumers are willing, or able, to pay such a high price, so we must lower the cost in order to sell our exciting new product.
As you can see from our supply chart, suppliers are only willing to supply 5 Nothings for $5. On the other hand, suppliers are willing to supply 25 nothings if the price is $25. If we supply Nothing for $25, the demand for Nothing will decrease, and we will not be able to sell enough of it to stay in business, and if we supply Nothing for $5, we will not be able to make enough profit to stay in business. There must be a happy medium somewhere, but how do we find it?
Quite simply, we look to the other side of the supply and demand theory and calculate the demand for Nothing. As we look at our demand chart, we see that twenty-five people would want our product if it cost $5, but only five people would demand Nothing if it cost $25. When we put these first two charts together, we get a supply and demand chart. From this, we can see that the supply and demand lines cross over each other. This point of crossing forms the price where the amount demanded equals the amount supplied This is otherwise known as the equilibrium price. As you can see by our supply and demand chart, the equilibrium price for Nothing is $15.
As more consumers learn the joys and benefits of owning Nothing, demand for Nothing will increase. This increase in demand would mean that the demand for Nothing has increased at all prices, and consumers are now willing to pay more for Nothing. Many things can cause an increase in demand. Changes in consumer tastes, and changes in consumer income are two of the factors that could affect the demand for Nothing. The results of this increase in demand can be seen in our Rising Demand Chart. As you can see from this final chart, the quantity demanded at all prices has increased, and the equilibrium price is now at $17.50.
Supply and demand are essential for reaching a price that will keep both the supplier and the consumer happy. Finding the equilibrium price is the key to a successful product, and I hope your product sells as successfully as Nothing.
