For any market-based economy to function, the laws of supply and demand must be met. Simply put, producers must supply the products and/or services their customers want to purchase, at a price the customer is willing to pay.
The law of supply definition is used in reference to the types of goods or services a market can create, and the law of demand definition is used to explain the types of products or services customers and clients are willing to purchase or consume.
Yet, while the two principles of supply and demand are congruent across economic theories, there are additional rules that will help us understand what is supply and demand, and how to think about it for small business owners and entrepreneurs.
How Supply and Demand Sets Price for Goods and Services
The entire process begins with customers “demanding” a particular good or service. Now, “demand” is a strong word!
Typically, unless your Apple releasing a new product or even if there is rumoring of a new product, your business probably won’t have a line outside your door with customers camped out for days on end demanding you release your product…
ansleyRDgroup has seen too many people whom “want to be a business owner” attempt to turn their hobby or passion into a business. This does work at times, especially with the explosion of access to niche markets via the Internet. However, prospective business owners must ensure the market is large enough to support a “business”.
There must be sufficient demand.
Otherwise you may merely end up with a hobby that pays for itself, rather than a business that funds your family and your team members’ families, allowing you to have a positive impact on the world.
Let’s go back to our example with Apple.
As demonstrated with Apple, when customer demand is strong (powered by congruent belief in a company’s core ideology), producers can practically set the price as high as they want for their goods or services.
As long as customers of Apple are willing to purchase Apple goods at a premium, Apple will continue to manufacturer and sell them at a higher price than seemingly comparative options and competitive brands.
However, the same law of supply and demand also dictates that if prices get too high, the number of customers willing to purchase the product will drop off, if not plummet.
Businesses as a Whole
While not a perfect example (due to the number of variables in play), this is easily seen in the recent August 2015 US Stock Market correction. Historically compared, the stock prices of many of the companies represented across the exchanges were propped up and inflated beyond what fundamental analysis would support.
In essence, demand was so high, that the prices of the businesses kept rising and rising.
In the span of merely 4 days the US Stock Market drastically changed directions for the average investor.
People demanded something else from the market!
When Demand Plummets for a Specific Product
This can be seen as well in a specific product if we go back to the stock market crash of 2008.
What happened to automobile manufacturers that were producing SUVs and high gas consumption vehicles?
All of the sudden buyers no longer wanted to purchase SUV’s…they wanted smaller more economical cars…if they were willing to purchase a new automobile at all.
Lesson #1 for the Small Business Owner and Entrepreneur
The economic moral of these examples is this: To adequately meet the demand for their goods, producers must charge a price that people are willing to pay; while at the same time generating profits for themselves.
Prices have to be correlated to competition, and the current and anticipated future demand for a specific product or service within a given market.
Understanding Market Equilibrium
This brings us to the economic principle of market equilibrium.
When there is a balance between supply and demand a market can be said to have reached market equilibrium.
This is when resources are being used to their maximum efficiency.
Whether you are looking for a full fledged degree or to simply gain specific knowledge within a certain subject (this is what the wealthy do!) economists and many heads of larger business have studied topics covered within an online bachelors of business administration program in order to figure out how they can best attain market equilibrium for their products and services.
Lesson #2 for Small Business Owners and Entrepreneurs
As a small business owner and entrepreneur within your market niche, you must find that balance specific to you and your products and services wherein your resource investment returns the highest rate while navigating the edge of price to the customer and client.
This sweet spot can be the hardest to find, but once you do, your business will begin to have a surplus while gaining repeat purchases and strong referrals and recommendations from current purchases, to new purchasers.
What to do from here…
ansleyRDgroup offers a breadth of knowledge and experience to help you build your business, change your life, and impact the world. We follow an adaptable process that allows us to be successful in multiple businesses and with our clients. It all starts with the 3 Areas of Focus.