Understanding The Laws Of Supply And Demand

Before I went to college, I thought there was one law of supply and demand.  There are actually two laws: One law of supply, and one law of demand.  Supply and demand may be interrelated, but when you look at the laws you are looking from two different viewpoints.  One as the consumer and one as the supplier.

If you sell a product that is in high demand, you can sell it for a higher price and will not see a decline in sales.  The higher you go in price, the more demand will drop off, until it drops off a cliff (i.e. no sales).  You will want to price where you make the most overall profit, which will be some mathematical formula where profit per item times units sold will be the greatest amount.  For some items, a small change in price will eliminate sales; for others it takes a large change in price for sales to drop off.  This difference is called the elacticity of demand.

If you are the purchaser or consumer of an item, supply will tend to drive your price.  The more different vendors you can buy from, the greater the supply of an item, or your ability to substitute another item will give you leverage to get a better price.

As a reseller of an item, your best bet is to buy an item in plentiful supply to you that is in great demand in the marketplace; so much so it outpaces the retail supply.  If it is difficult for other businesses to enter this market and sell to the consumer, it is better for businesses already servicing the market.  If you can be in a market where all of these things happen, you’ll have a perfect storm that will create a whirlwind of profit.  However, this is pretty rare so don’t hold your breath… you just want to look for the best possible situations that work in your favor.

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