A Guide to Demand and Supply Analysis

Introduction

 

The study of how buyers and sellers interact to determine transaction prices and quantities is known as demand and supply analysis. As we'll see, prices reflect both the value of the next (or marginal) unit to the buyer and the cost to the seller of that unit. 

 

The most basic set of microeconomic tools in private enterprise market economies, which are the primary concern of investment analysis, is demand and supply analysis.

 

Consumers (or households) and firms are the two types of private economic units classified by microeconomics. The theory of the consumer and the theory of the firm are two branches of study based on these two groups. 

 

The consumer theory is concerned with utility-maximizing individuals' consumption (demand for goods and services) (those who make decisions to maximise satisfaction from current and future consumption).

 

The firm theory is concerned with profit-maximizing firms' provision of goods and services. The consumer and firm theories are important because they help us understand the underlying principles of demand and supply. The theory of the consumer and the theory of the firm will be the focus of subsequent readings.

 

What is Supply and demand analysis?

 

Two laws are at the heart of a supply and demand analysis: the law of demand and the law of supply. According to The Business Professor, the law of demand states that as prices rise, the quantity of desired goods and services decreases. The law of supply, on the other hand, states that as prices rise, so does the number of goods and services available.

 

A technical assessment of securities based on factors influencing supply and demand for a specific security or for securities in general. The purpose of the supply-demand analysis is to see if there is or will be an imbalance between supply and demand for securities. 

 

For instance, if a security's supply is expected to exceed demand, the security should be sold or avoided because its price is likely to fall. New stock offerings, government borrowing, pension fund contributions, mutual fund cash balances, and a variety of other similar factors are all factored into the supply-demand analysis.

 

Also Read | Factors affecting the supply of a product

 

When to apply Supply and demand analysis?

 

With a few exceptions, the law of demand states that as the price of a good or service rises, so does the quantity demanded. The law of supply states that as a supplier's price rises, so does the quantity supplied. Demand is often a downward sloping curve in the price-quantity plane, whereas supply is an upward sloping curve.

 

The market equilibrium is defined as the intersection of the supply and demand curves, which determines the equilibrium levels of price and quantity of a particular good (or service) in the economy. Excess demand describes a situation in which the current demand for a good (or service) in the economy exceeds the equilibrium quantity.

 

In a similar vein, excess supply is defined. Changes in supply and demand (and thus the equilibrium price and quantity) of any good or service can be influenced by a variety of factors, including policy changes, unexpected economic shocks, business cycle fluctuations such as a recession or a boom, or even simply over time (long run versus short run).

 

It also depends on the market's characteristics (whether the market is perfectly competitive or monopolistic etc.). The study of supply and demand, or simply 'Demand-Supply Analysis,' could be applied to all of the above. (source)

 

Supply-demand analysis tool

 

A comprehensive strategic planning approach includes supply and demand analysis. Because the market and consumer habits are rapidly changing, it's all about making sure you're always responding in the best way possible to the needs of the customers you're trying to serve.

 

This tool will give you a solid foundation for a supply and demand analysis, which can then be used to inform a more comprehensive strategic planning process.

 

The Supply/Demand Analysis feature is a chart that is directly embedded in the scenario. The graph shows the supply and demand planning data over time in a combined view.

 

The supply data is shown as a stacked bar graph, with the area stacked vertically according to the building or lease. The demand data is shown as a line graph that is superimposed on the bars. This graph depicts how an organization's space or area supply compares to its demands.

 

You can use this tool to interactively analyse scenario options to match forecasted business demand to portfolio space supply over time. The graphical analysis tool can assist you with the following:

 

1. Visually identify supply-demand gaps that necessitate action planning to meet demand or maximise portfolio utilisation.

2. Consider what-if supply-side scenarios for lease contract options, new building expansions, and portfolio consolidations.

3. Examine the effects of demand-side changes in order to match supply or close gaps.

 

Also Read | 11 Types of Economic Theory

 

Importance of demand and supply analysis

 

1. Demand analysis

 

For a new business, the analysis can determine whether there is a significant demand for the product/service, as well as other information such as the number of competitors, size of competitors, industry growth, and so on. It aids in determining whether a company can enter a market and generate sufficient returns to sustain and grow its operations.

 

Demand analysis aids in identifying key business areas with the highest demand and areas that require attention, as low demand can indicate a variety of issues, such as customers not being aware of the product/service, which necessitates increased advertising and promotion, or customer needs not being met by current product/service, which necessitates improvements, or competitors have sprung up with better offerings, among other things.

 

2. Supply analysis

 

Supply analysis aids manufacturers in determining the impact of changes in production and policies on the increase or decrease in finished goods supply. 

 

For example, newer upcoming technology can aid in the production of more goods in the same amount of time. The results of the analysis can be used to determine whether or not this new technology should be adopted. 

 

Is there a demand for more products if this technology can help produce more? What effect will it have on the current labour market, and how will it affect supply?

 

Another example is the impact of market wage increases on supply. The cost of labour will rise, and with it, the cost of goods will rise as well. 

 

If the supply must be maintained at the same level, the costs must be maintained at the same level, and if the supply must be maintained at the same level, the supply must be reduced, driving up prices if the demand remains constant. These are some of the questions that supply analysis aims to address.

 

Also Read | What is Scarcity in Economics?

 

Demand analysis parameters

 

1. Price of similar products

 

As we discussed in the first two points about price and purchasing power, the price of a competitor's product or service enters the equation and can influence demand. If a competitor's price is lower, demand for that product will be higher, and vice versa. In the case of luxury or niche products, the situation may be different.

 

2. Customer preferences and requirements

 

Consumer behaviour must be taken into consideration. The product or service must match the preferences of the customer; otherwise, there will be no demand for it.

 

3. Price set by the product itself

 

In demand analysis, the product's price is very important. Demand will be affected if the price is too high in comparison to competitors or what the customer can afford. It can be low or high, depending on the product or service's price point.

 

4. Profits from customers

 

Customer purchasing power has a significant impact on product demand. If a product or service is offered at a price point that is higher than a customer group's affordability, demand will be low, so customer income must be considered.

 

5. Customers in the market

 

Customers drive demand, so the potential market is an important parameter for demand analysis. If the customer base is too small for a viable business, even if the first five points are favourable, demand will never rise because the customer base is too small.

 

6. Expectations

 

Based on the overall industry landscape, the customer may have expectations for a new or existing product. For example, if every competitor in the market provides free warranty service but one company does not, that company is unlikely to meet customer expectations. (source)

 

Example of demand-supply analysis in tariffs

 

A tariff is a tax imposed on goods from other countries that are sold in the United States. Assume that foreign-made automobiles are subject to a 10% tax.

 

Who would be the ones to bear the brunt of this tax? Assume that a Japanese car and a similar American car both sell for $25,000 in the United States.

 

According to the source, with the ten per cent tax ($2,500) on Japanese cars, the Japanese company wants to raise the price to $27,500. The tariff will be imposed on Japanese automobile manufacturers.

 

A tariff on a foreign product with very elastic demand is referred to as an optimal tariff in technical terms. In the United States, the price of a foreign product rises very slowly.  

 

Also Read | Law of Diminishing Marginal Utility