Supply and Demand 101

When the demand for an item increases but the supply stays the same, or decreases, prices tend to go up. That’s exactly what happened with toilet paper in 2020!

Toilet paper, panic, supply, and demand

The main reason why toilet paper was in short supply is because of hoarding. When people heard the news that the pandemic would be long-term, they started stockpiling the product just in case there would eventually be a shortage. This created an artificial demand surge, one that the manufacturers weren’t prepared for. As a result, production and distribution could not keep up with the unprecedented demand, leading to a shortage.

Thankfully, manufacturers have been able to adjust and increase their supply of toilet paper, so that now it’s much easier to find in stores.

Supply and Demand Impact Prices

Supply and demand is the core principle of capitalism. Being able to control the means for production, the lines of distribution, and then feed the demand for your product is the track to success in the western world. So, without further ado, let’s get into my supply and demand 101 lesson.

What is Supply?

Per the Oxford Dictionary, supply is defined as “a stock of a resource from which a person or place can be provided with the necessary amount of that resource.” Basically, it’s how much of a thing you have to sell. If not a physical product then you can apply it to the number of people available to provide a service (think a barbershop or hair salon). That’s all well and good but let’s make it a little more tangible (you’ll quickly see how difficult it is to talk about one without the other).

Eggs. It’s ok. I know. This perfect storm of rising farmer costs, higher demand (see, told you) during the holiday season, and the worst avian flu epidemic since 2015 means fewer eggs for a rising population.

  1. The increase in costs for the farmers means one of two things: either they have to have fewer chickens (which equals fewer eggs i.e. supply) or they have to increase prices. It’s pretty obvious which way most farmers are going.
  2. Though we’re not seeing country-wide, pandemic-level shortages, we are seeing very local issues (California being a notable example). Still, it is a perfect example of supply not meeting demand and how that affects prices.
  3. The avian flu kills MILLIONS of egg-laying birds which, again, highly affects the available supply.

What is Demand?

Once again we turn to the Oxford Dictionary which defines demand as “an insistent and peremptory request, made as if by right.” People needing a thing creates demand. People needing a service creates a demand. When you want something you, hopefully very nicely and respectfully, demand it (technically speaking).

Back to our eggs. When you’re single, you might buy a carton of eggs. You get married and you might need to buy them more often. Add a kid or two and you need even more. Just in your own household, your demand for eggs has gone up. Consider the holiday season (deviled eggs!!) or Easter egg hunts and there may be spikes in demand because people will need/want more than usual.

How Do Supply and Demand Effect Each Other?

There are a couple cycles of how supply and demand flow into each other.

  • High supply/low demand: Bad for business. You have a lot of a product that consumers don’t want. Price drops/sales may improve demand a bit but can still hurt your bottom line. You can’t sell enough to justify your stock which is likely to lead to downsizing or closure.
  • Low supply/high demand: COULD be good for business. If you have a solid customer base, they will likely wait with bated breath for your to restock and buy every last bit of whatever you’re selling. If you’re newer, people may move on when they can’t get what they need in a more timely manner. However, if you have a rare product (exclusive/unique clothing, art, etc) you are in a position to charge a higher price. A great way to maximize profit with less stock.
  • Supply = demand: You make it, they buy it. Prices stabilize, typically a good zone for both the business and the consumer.

What Does This Have To Do With You?

Understanding supply and demand as a consumer is SUPER important. Don’t believe me? Remember how NFTs were everywhere just months ago? Though there are many factors involved the bottom line is the demand has plummeted from where it once stood. With that drop in demand, we’ve seen a complete crash in price. The days of multimillion-dollar NFT sales are, at the very least, on pause as there is no shortage in supply but little to no demand.

This is the same for everyday products. Remember those brothers in Tennessee that bought all that hand sanitizer during the heart of the Covid pandemic? The demand was higher than ever and they forced a shortage in supply allowing them to sell for as much as $70 in some cases. To compare, depending on size, you’re paying about $2-$13 normally.

Consumers possess more power than they likely understand in most situations because of supply and demand. My favorite way to exercise that power is with games. There are always going to be some titles that I HAVE to have day one. For others, I wait to see what the rest of the gaming community does. If they buy it in droves, I might have to bite the bullet and pay full prices if I want it sooner rather than later. However, if the early sales don’t reach the company’s goals (if the demand is lower than the supply), those early sales hit. It is not uncommon to see even newly released titles on sale for as much as 25% off just a month or so after release.

Beware, companies have their tricks as well. Faux limited editions that will “never be rereleased” or limited quantity releases prey on consumer FOMO (fear of missing out). They stoke the fires of demand by making you believe they don’t have the supply. This is seen quite a bit in the beauty industry from what I’ve seen so be careful getting gifts next holiday season. You might see it back on the shelves by Valentine’s Day at half the price.

Understanding the “why” behind things helps us make better money moves. When you know how things work, you can make the best decisions for you and your money. Keep your ear to the street, your eye on those price tags, and your hands on your money. Understanding supply and demand is just another tool for taking another step toward your personal financial goals. Now get out there and get it!

Headshot picture of the writer of this article, Kenneth Medford III, with a muted black and white filter.
Kenneth Medford III

Writer, rhymer, gamer: the easiest way to define the man known as Kenneth Medford. I’m a simple man who loves to learn and loves to help and I wander the digital world trying to find ways to sate my hunger for both. Basically, I’m Galactus but helpful.

Check out my other work here or reach out to me on LinkedIn.

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