- The forces of supply and demand are essential components in a market economy that determine the price and quantity of goods and services.
- Supply refers to the quantity of a good or service that producers are willing and able to offer for sale, while demand refers to the quantity of a good or service that consumers are willing and able to purchase at a given price.
- We have already discussed these concepts in detail in another topic.
- These forces interact to produce the equilibrium price (see explanation of this again below)
- In this instalment, we will look at why it is important for decision-makers to learn about the forces of supply and demand
- We will also look at what happens when the forces of supply and demand are violated especially by the governement
Importance of Supply and Demand to Marketers and Decision Makers:
- Understanding the forces of supply and demand is crucial for marketers and decision makers in businesses as it helps them to make informed decisions on pricing, production levels, and inventory management.
- By analyzing supply and demand trends, marketers can identify market opportunities and adjust their pricing strategies to maximize revenue and profits.
- Decision makers can also use the knowledge of supply and demand to determine the optimal level of production and inventory to meet consumer demand and avoid excess inventory.
- The equilibrium price is the price at which the quantity of a good or service demanded by consumers is equal to the quantity supplied by producers.
- At the equilibrium price, there is no shortage or surplus of the good or service in the market.
- The equilibrium price is determined by the intersection of the supply and demand curves.
Price Floors and Price Ceilings:
- Price floors and price ceilings are government-imposed price controls that are set above or below the equilibrium price.
- A price floor is a minimum price that sellers can charge for a good or service, while a price ceiling is a maximum price that buyers can pay for a good or service.
- Price floors are usually set to protect producers from low prices, while price ceilings are often implemented to protect consumers from high prices.
- However, these controls can lead to unintended consequences such as shortages or surpluses in the market.
- This only happens when a price ceiling is set below the equilibrium price or a price floor is set above the equilibrium price
- When the former happens it usually results people establishing a black market where products are sold at the equilibrium price
- When the later happens it usually results in glut or excess supply on the market
- A black market is often the result of the government setting a price ceiling that is below the equilibrium price
- For example the government of Zimbabwe often set a USD to ZWL rate that was too low in a bid to make it appear like the Zimbabwean dollar was strong
- The government has done the same with fuel in the past where they set a maximum fuel price that was too low
- The black market refers to illegal or unregulated markets where goods and services are bought and sold outside of the official market channels.
- Black markets can arise when there are price controls in place, and consumers are willing to pay more than the regulated price.
- For example, during times of shortages or when price controls are imposed, essential goods such as food and medicine may be sold on the black market at inflated prices.
- A glut refers to an oversupply of a good or service in the market.
- This usually occurs when there is excess production, and the quantity supplied exceeds the quantity demanded.
- The most common reason why glut can happen is if the government sets a price floor that is above the equilibrium price
- When a glut occurs, producers may be forced to reduce their prices to clear their inventory, leading to lower profits or even losses.