Date: February 5th 2010

In the last email we discussed how the supply and demand curves illustrate an equilibrium market price for a product. Understanding the demand curve for the market for your business can be beneficial with respect to making decisions about price, production, and understanding consumer satisfaction. Trying to understand the supply curve helps focus attention on decisions market competitors may make.

Unlike the demand curve, which moves inversely to price, the supply curve moves directly with price (as price goes up, the production of the product increases). This reflects the willingness of producers to produce more products as long as the consumer is willing to buy at a price that is greater than the cost to produce. In a market place where prices is high because consumers cannot find all the product they want, competitors will be attracted to the market to increase the supply.

When we attempt to construct a supply curve for a market, we are trying to understand what choice is now available to the consumer and what that choice might be in the immediate future. These are important determinations in the strategic planning for a business. Critical to this inquiry are two factors. Is the market one which is difficult to enter? Is our product different from other products, by brand identification or quality, that its utility to consumers cannot be easily duplicated?

In a market with history, we will know what the equilibrium price is – that is the current price. By constructing demand and supply curves on a graph, we attempt to portray with an objective numbering scheme our perceptions and forecasts about the market. Next time we will talk more about this and putting production information into the analysis.

Please comment or post with your thoughts on the supply curve for your market.

© Rick Riebesell 2010. All rights reserved.

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