Supply and Demand

Supply and demand are interrelated terms in both economic and business speech. There is no supply without demand. The demand of a specific product or service becomes an idea for a new business to start and a new way to satisfy customers. In this article, we are going to have a simple justification for supply chain and business folks about both demand and supply from two common standpoints, i.e. economic perspective and business perspective.

The Supply is a wide used term that has its own definition according to its position in the speech. If we are going to discuss the term supply in an economic speech, it can be defined as “the capability of providing product and services to the market to meet its needs”. This capability can be presented as Supply Curve.

Supply curve is an illustration of a positive relationship between price and quantity of a supplied product or service. When the quantity supplied of a specific product increases, the price will increase. The price increase is not absolute as it is affected by other factors such as the price of the substitutes, production technology or labor costs.

While in business speech, we can identify it as “A continuous flow of raw materials, final products, and services into the market according to its demand”. When demand is seasonal, the products flow is seasonal, i.e. summer season for ice cream products or Christmas season for buying gifts and gadgets.

The Demand is described as “the desire to obtain a specific product or service based on a tenacious need and to pay for its agreed market price”.  No one is going to pay for a product without necessity and proper price. This relationship between the quantities needed and the desired price can be presented as Demand Curve.

Demand curve is a diagram for a negative relationship between price and quantity of a demanded product or service. When the quantity demanded of a specific product increases, the price will decrease.

Every supply chain or business folks need to understand how to match supply with demand in any market. Since demand and supply are solid terms, the next graphic displays both demand and supply curves to identify the fair market price and the feasible quantity of products to be produced and sold to achieve the equilibrium state of the market.

The Equilibrium Point is when the quantity supplied by businesses is equal to the quantity demanded (Q*) by customers at the fair market price (P*). Above this point the quantity demanded is lower than the quantity supplied so there will be a product surplus that will affect the business through obsolete inventory. On the other side, when quantity supplied is lower than the quantity demanded, there will be a product shortage. To avoid that, the equilibrium point is managed through the price mechanism by the market through shifting the demand or supply curves and define new reasonable market price.