It’s a basic concept in economics, the law of supply and demand. The ramifications to your daily life are widespread as essentially it is a law of how pricing is determine on all things with which you financially interact. Perhaps by taking a deeper dive on this law we can determine some things that might be helpful in your financial life.
Introduction to Supply
The general concept of supply is that there exists a line with a slope. This line represents the quantity of an item “the market” will produce at a given price point. Above that price point more will produce an item as it is worth it to invest in more capacity to do so. Below that price point less will be produced as it will not be worth it to invest in more capacity to do so.
Introduction to Demand
Meanwhile the concept of demand is the opposite. A line exists with a slope. As you go along the slope each point represents the amount society will buy at a given price. Above a given price point on the line fewer people will buy. Below a given price point on the line more people will buy. This is inherently because at some point the value of the item being sold is worth more or less to the individuals buying then they pay for it.
The cross between these two points, the demand and supply, represents the optimal point of production, demand, and pricing for the entire market. The point where in the absence of outside interference the market will settle on price. That’s the basic concept they teach in intro to economics, but the real world is considerably more complicated.
What is the Market when it comes to Supply and Demand
The first thing to examine is the concept of “the market”. The market does not equal everyone. It might not even equal everyone who might have interest in an object. Consider the concept of you sitting on a lonely street corner with no phone waiting for a cab. You are in a place where only one cab will go by an hour. So even if you are in a city of a million cabs, you have only one supplier. There is no competition. As such the market does not define the price. No in this case the demand slope is set by the value of that cab ride to you. The cab driver meanwhile can potentially go elsewhere for a faire, so technically they have a larger definable market. As such they can charge you more than the rest of the market. This is why concepts like Uber have taken off, to expand people’s supply side market allowing for overall declines in price.
Imperfect Information and Supply and Demand
This imperfect information problem is prevalent everywhere. Have you ever wondered why companies produce coupons for their items? Because they can effectively segment the market into two groups. Those who use coupons with a lower price and quantity equilibrium, and those who do not with a higher price and quantity equilibrium. Combine the two and the manufacturer makes more profit. Defining the market is the action that maximizes the profit, rather than simply throwing out a product blindly. That’s why a small business or even a side hustler it is important to differentiate yourself based on your target market, you’ll end up more profitable.
But the ramifications here are deeper for the buy side.
Ramifications of Supply and Demand to Purchases
When making a purchase like a game console, TV, or movie you’ll get it cheaper when the hype has died down meaning less demand. You are essentially waiting for the demand to decrease in which case the price will decline.
When making a purchase a little bit of effort will likely pay off. Coupons and even discounts are rarely hidden, they are based less off obscurity and more off people’s willingness to look for them in the first place. You can get ahead, if within reason, you look for those discounts. Just don’t trade more time for those discounts then they are worth.
Inverted Demand Curves
One type of demand curve we haven’t spoken about yet are inverted demand curves. There are items out there where the perceived value is driven largely by price. The higher the price the higher the quantity sold. Brand name items, luxury cars, etc. Many of these are as much about the name as the pricing. If you could pick up Ferrari for 20K and everyone had one they would no longer be special. As such the value to most people, who buy on the uniqueness of the car, would decline. Therefore so would the demand over time. Look for these products, ones where the value is defined less by the underlying item and more by their price. Avoid them for cheaper alternatives that do the same thing.
Supply and Demand Curves and the Labor Market
Supply and Demand even apply to the Labor Market. When you work a career your skills determine the other people in your market. The demand side is the companies need for those skills. A glut of those skills will lower everyone’s pay, and a dearth will increase it. Nursing for example has been a notorious market for shortage over the years. As such Nursing has paid pretty well over the years. Going back to 2003 I graduated with a glut of computer science majors. When the dotcom bubble crashed the supply simultaneous sky rocketed and the demand plummeted. I ended up with a hard time finding a job. Realize any career you choose you should search out skill sets that make you both in demand and unique.
Supply and Demand Shocks
The last example also illustrates one final concept of supply and demand. The concept of a supply or demand shock. The equilibrium point we referenced always assumes demand and supply are stable. But things change over time. It becomes easier to get a computer science degree as for profit online schools pop-up all over the country. Demand declines as the stock bubble disappears. Or more close to home to society in general, the newest fad or fashion fades. On the supply side the same occurs when some supplier comes along that can produce something more efficiently. In either case these changes shift these curves thus changing the price of the market over time.
Take Advantage of Demand Shocks
As you make a purchase, direct your career, or anything else you should be on the lookout for these shifts. Are the universities increasing the number of people they are cranking out with your degree dramatically? Does it appear that product X is beginning to pile up on store shelves? Is the latest skill set in your field becoming the thing. You likely won’t see them until you are on top of them, because lets face it, no one has a crystal ball. But even when they occur there is usually a time where the market is still adjusting to the new price. That is the time you have to adjust your skill set, execute a purchase or any number of other actions that take advantage of a change. Take advantage of that period in your life and you will do better than most people.