Tag Archives | supply and demand

Supply and Demand Elasticity

See Also:
Economic Indicators
Balance of Payments
Stagflation
The Feds Beige Book
What are the Twin Deficits?

Supply and Demand Elasticity

Supply and demand elasticity is a concept in economics that describes the relationship between increases and decreases in price and increases and decreases in supply and/or demand. We have described it in greater detail below.

Price Elasticity of Demand Definition

In economics, demand refers to customers’ need or desire for a given product or type of product and their eagerness to purchase that product. The more customers want a certain product, the more demand there is for that product. Less desirable or necessary products have lower demand in the marketplace.

What is elasticity of demand? Price elasticity of demand refers to the degree to which demand is influenced by changes in price. Basically, price elasticity of demand describes consumers’ sensitivity to changes in price. For example, if the price of a product suddenly goes up, broadly speaking, fewer people will buy it because it is more expensive. Perhaps people can no longer afford the product, or perhaps they feel the product costs more than it is worth. Regardless, to some extent, at least academically speaking, when prices rise, demand falls.

If a slight price increase causes a large decline in demand, price elasticity is high. Similarly, if a slight price decrease causes large increase in demand, elasticity of price is high. On the other hand, if a large price increase is required to cause any decline in demand, price elasticity is low. And if large price decreases are needed to cause any increase in demand, elasticity of price is low.

In sum, if a small price change causes a dramatic change in demand, price elasticity is high – consumers are highly sensitive to price changes. If small price changes cause little or no effect on demand, and substantial price changes are needed in order to see any effect on demand, then price elasticity is low – customers are less price sensitive.

Elasticity of Supply

In economics, supply refers to the availability of a particular product in the marketplace. If a particular product or type of product is widely available in the marketplace, that product is amply supplied. If there is a dearth of a particular product or product type in the marketplace, that product is in short supply.

Supply is also related to price. When the price of a product rises, supply will increase. This is because the makers of the product want to maximize profits by selling as much of the product as they can while prices are high. This will flood the marketplace with that product, leading to an eventual overabundance of the product. When products are too abundant – when there is too much supply available – prices fall. If everyone in town has the same red hat, you won’t be able to charge very much for yours.

If you want to find out more about how you could utilize your unit economics to result in profits, then click here to download the Know Your Economics Worksheet.

supply and demand elasticity

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Market Dynamics

See Also:
Asset Market Value vs Asset Book Value
Efficient Market Theory
Market Positioning
Marking-to-Market
Business Cycle
Market Segmentation
Brand Equity

Market Dynamics Definition

Market dynamics, defined as the factors which effect the supply and demand of products in a market, are as important to economics as they are to practical business application. Many economists established market dynamics. Arguably, they are most developed in Porter’s five forces of competition.

Market Dynamics Meaning

Market dynamics means the factors that effect a market. From the theory of economics they would be supply, demand, price, quantity, and other specific terms. From a business standpoint, market dynamics are the factors that effect the business model which involves the applying party. In comparison, the dynamics may be the price of a barrel of crude, total oil production, total national or international stockpiles of oil, the price of other energy commodities, and more for an oil firm. Whereas for a web 2.0 business, a social network for example, market dynamics analytics may be the total amount of free time spent online for both national and international users, amount of money spent online each year, growth of online advertising, and more.

For a prudent business, market dynamics are included in the market analysis of their business plan. Furthermore, these factors affect the business so much that it would be neglectful to exclude them. In conclusion, market dynamics play an important role in the marketing plan of a business. They may also play an important role in other areas such as cost of goods sold, distribution, logistics, and more.

Market Dynamics Example

Charlotte is writing a marketing plan for her new business. Charlotte sees a real need in the fashion industry for high quality accessories like purses and necklaces. Her experience in retail gives her a strong base to refer back to.

To complete the marketing plan she must complete a competitive and industry analysis. Essentially, she needs to assemble a market dynamics analysis for the fashion industry, with respect to accessories. Then she needs to understand them so she can fill a space for customers not being served.

Charlotte starts with the industry analysis. She looks at a number of statistics: consumer spending rate, retail growth, growth of the fashion industry, growth of brick and mortar business sales, and the competencies of wholesalers. Here, she is assembling market dynamics in order to find whether the market can support her business. She knows this an important foundation for her idea.

Next, Charlotte performs a competitive analysis. She finds all competitors and similar businesses. Then, she analyzes their strengths, weaknesses, and the perception of these companies to the average consumer. From this she realizes a matter of key importance: though clothing, cosmetics, and other stores exist there is no provider for the accessories which complete an outfit. She is satisfied and resolves to continue research to keep up to pace with her industry.

Prepare for the best… and the worst. Download the External Analysis to gear up your business for change.

Market Dynamics

Strategic CFO Lab Member Extra

Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

Market Dynamics

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