Supply and Demand
The economic model that determines the price of anything in a market is known as supply and demand. It is a term found in microeconomics, which is a study focusing how a person or a company manages their rare resources, and it promotes a competitive market, goods, services, or assets will change in price until it reaches a point of certainty. This is based on how much of it is available and how many people want it, with results in economic equilibrium, or a balanced state of supply and demand.
The supply part of supply and demand is how much of a certain good, service, or asset it available. For example, if you had a lemonade stand, and you had enough ingredients for 3 pitchers of lemonade, your supply of your product is equal to 3 pitchers of lemonade. Demand is how much people want the lemonade, so if you can sell 2 pitchers in 3 hours of being open, then the demand is equal to 2 pitchers.
You would then figure out the most amount of money you can charge for the product and still sell your product. The more people that want it is usually a good indicator, however you must look at how much people are willing to spend in the area.
If everyone wants your lemonade, because it's the best lemonade they've ever had, then they are more willing to spend money on your lemonade as well. The same is true if you made not the best lemonade, but sold at a cheap price. These are the basics of supply and demand, and show what is in high demand and what is in low.
A company will use a couple different resources to help track their supply and demand. One of these is known as a supply schedule, which is a table showing how much goods cost and how much of a good they have. This helps allow them to see if they need to produce more of the good for less than how much they would receive for it.
Another resource they will use is called the demand schedule. This usually contains information on the amount of goods that people are buying and at what prices they can afford. There is other information factored in as well, like how much a substitute good costs and how many of those are selling, as well as the cost of goods that go along with the original good being sold.
Demand is also measured by the taste and preferences of the consumers of the good, as well as what they expect when buying the good, and finally the number of potential customers a good can generate.
The history of supply and demand can be traced back to the 14th century Muslim scholars. A Syrian based scholar, Ibn Taymiyyah, wrote 'If desire for goods increases while the availability decreases, its prices rise'.
John Locke, who was an English philosopher and physician who is considered the 'Father of Liberalism', would comment in his book about the economy and give an indirect definition of supply and demand in the 1691 book, Some Considerations on the Consequences of the Lowering of Interest and the Raising of the Value of Money. The term wouldn't officially come up until 1767 when James Denham-Steuart would define it in his book Principles of Political Economy.
Supply and demand is a way for companies to make the most amount of money possible. There are various factors to consider in it, and often it influences the company including marketing strategy, how many people sit in management, and the bonuses each individual employee may receive. It is an important part of economics all businesses must learn.
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