Law of supply and demand
Law of supply and demand
Law of supply and demand (Protonk)

Supply and demand are probably the most recognized economics related words. Even though they are commonly used, the true definition is probably a little different from what most people think. Demand should not be confused with want. People want many things, but if they are not willing to pay for them, no demand exists. Similarly, supply deals with salable or usable goods, and all other factors being equal, as demand increases, the price goes up. Supply is more complicated than demand and an additional explanation shows that as long as long as costs stay the same, a higher price equals more profit. Therefore, a company will increase output (Colander, 2004, p. 91).

The law of demand states that, “quantity demanded rises as price falls, other things constant” (Colander, 2004, p. 84). Likewise, the law of supply states, “quantity supplied rises as price rises, other things constant” (Colander, p. 90). Therefore, it can be extrapolated that price has a direct relation on demand and supply. For instance, as the price of a commodity goes down, its demand goes up and as its price rises its demand falls. This can be seen in the gasoline market; as gasoline prices continue to rise, less demand is created as consumers find alternative methods of transportation.

Factors Related to Supply and Demand

Shift factors are important factors relating to demand. Important shift factors include income, price of other goods, tastes, expectations, and taxes and subsidies (Colander, 2004, p. 85). Basically any factor other than price that affects demand is considered a shift factor. Most economists agree that while shift factors do influence demand price is still the most important contributor to demand.

Supply can truly be thought of not as the actual number of units of a widget produced, but rather as the amount of product a company is willing to sell at any point on the price curve for a specific period. Just like demand there are shift factors related to supply. These shift factors include things like, costs, technology changes, expectations, and taxes and subsidies (Colander, 2004, p. 92).

Case Study

In 2007 beer consumption was up 1.4% from 2006. This signals a shift in the direction of beer consumption in the United States. The gains in the craft beer segment (under 2,000,000 barrels with minimal use of adjuncts) are even more astounding, up 12% (Theodore, 2008). Most analysts predict a continued rise in beer consumption for the next several years, although the smaller craft breweries may have a harder time due to increases in costs.

American beer drinkers are exposed to more specialty and craft beers every year, and even the giants of the industry are taking note. Consumers are willing to pay premium prices (demand) for high quality, unique products. Many of the smaller craft breweries are expanding at rapid rates to supply this demand. The barrier to entry is getting higher though as costs are increasing due to a weak dollar affecting barley prices and a worldwide hop shortage expected to continue until 2010.

Many mega-mergers are taking place as the large beer companies are shoring up holes in their product lines. For example, Budweiser is talking to Grupo Modelo, makers of Corona and Negra Modelo, to thwart a bid from the Belgian giant InBev NV. Budweiser has seen shrinking shelf space and declining margins for the last several years and its flagship product Budweiser lost an astounding 3.4% market share, $43,500,000, in food, drug, and mass merchandise stores and was totally flat in convenience stores. Budweiser still holds the overall lead in both markets with its Bud Light product, although Miller Lite is gaining in some aspects.

The market seems to be favoring both light beer and craft beers with traditional American style lagers losing favor. Imported beers are showing mixed results as price pressure is reducing demand for many beers and craft beers are gaining the reputation as high quality alternatives to the imported equivalents.

Socially, beer is losing its reputation as a “blue collar” drink. Many restaurants are now including beer guides as well as suggested wines on the menu. Sommeliers are starting to understand the complexities of the varied beer styles and many cookbooks and food shows are featuring beer, both for cooking and food-pairing. This all combines to keep demand for beer high, despite higher costs and the inevitable higher prices to come in the next year.

Conclusion

While most people have heard the terms supply and demand bandied about for almost every conceivable price argument, the truth is that markets create their own equilibrium. As prices drop, demand increases as more buyers decide to buy the product. Likewise, if the price goes up, due to demand causing shortages for example, suppliers will create more of the product to take advantage of the increased profit margin. It is important to understand that the terms supply and demand are really concepts, both driving the market equally towards equilibrium. An important note about equilibrium is the effect of government and social forces on supply and demand. These external forces provide a counter-pressure to the pure forces of supply and demand and create false shortages and surpluses.

References

Colander, D. C. (2004). Economics (5th ed.). Boston: McGraw-Hill/Irwin.

Theodore, S. (2008). Beer raises a glass to rising sales: Signs of a turnaround show reason for optimism. Beverage Industry, 99(4), 14-18.

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