Law of Supply and Demand

What it does:

The Law of Supply and Demand helps a company set the most profitable price for what it sells.

Its other names:
Supply and demand.

Where it comes from:
The Law of Supply and Demand comes from the 1890 book Principles of Economics by Alfred Marshall, now available from Prometheus Books.

Summary:
If a price is set too high, it will leave the seller with goods it cannot sell. If the price is too low, all available goods will be sold and consumers will not be able to find them.

Viewed from another perspective, the Law of Supply and Demand tells us that if many people demand a product, the price will rise. If demand for a product is low, the manufacturer will lower the price to stimulate buying.

Bottom line: A self-stabilizing "right" price exists for any product, also called the "market-clearing price." This price will be achieved when supply and demand balance.

This principle can be seen at work in the marketplace as prices adjust to marketplace realities.

Case study: When Panasonic introduced its first DVD recorder several years ago, market demand was extremely high and prices were set above $800. As initial demand relaxed, supply increased and Panasonic dropped the price to move more products. When other electronics companies introduced competing recorders, prices fell still further because the supply had increased even more. When it became possible to buy a DVD recorder for about $200, Panasonic added hard drives and other features to its DVD recorders to build demand. For the moment, demand for these new models is keeping prices up, but as demand decreases for them, prices are sure to drop again.

What else you need to know:
For more information on the interrelationship between price and demand, see the Trump Management Briefing on Price Elasticity of Demand.