Supply and Demand Model and Importance for Managers

“It is easy to train economists. Just teach a parrot to say Supply and Demand.”

(Thomas Carlyle)

While I was doing my degree in literature, it was my favorite phrase in the company of my economics friends. They always tried to find some tricky expression like it but often failed. At that time I didn’t know that I will have to study economics one day and learn these three words but...

...not like a parrot (sorry friends!)

Economics professors don’t teach these three words like that.

They describe the whole market mechanism with a simple graph. Demand and supply model is the backbone of modern economics and being taught in all elite universities of the world. Whether you study macro or microeconomics, your lessons plan starts with this model.

Demand and supply are crucial for the managerial economics as to other branches of economics. In fact, we can’t understand underlying managerial principles without knowing this model and its implications.

That’s why this section of the website is going to discuss and allow you to contribute to different aspects and exceptions to this model.

What is Supply and Demand by the Way?

Robert Ernest Hall, Marc Lieberman say in “Microeconomics: Principles and Applications”:

“Supply and demand is just an economic model – nothing more and nothing less. It’s a model designed to explain how prices are determined in certain types of markets”.

In our managerial lives, the most difficult decisions are about prices and costs of different commodities. When we want to purchase something for our company or public, we need not only to compare but also analyze different elements affecting prices. When we want to sell something, we have not only to keep in view the costs but also expenses and quantity of the similar kind of products already being supplied in the market. We have to fix the prices at a level that can generate economic profit otherwise our company may close and terminate our services.

supply demand

It means the model is very important for managers, public or private.

Traditionally, the law of demand and supply is based upon equilibrium point which is the result of the intersection of demand and supply curves. This point explains two things:

i)    What will be the price of the product that sellers want to pay?

ii)    What quantity will a producer like to supply at the offered price and earn the economic profit?

But it is straightforward view.

Economists like Robert S. Pindyck & Daniel L. Rubinfeld, Stigler, Landsburg, and Baumol and Blinder have discussed this model in length.

Robert S. Pindyck and Daniel L. Rubinfeld, while discussing basics of supply and demand say:

“Supply demand analysis is a fundamental and powerful tool that can be applied to a wide variety of interesting and important problems. To name a few:

• Understanding and predicting how changing world economic conditions affect market price and production.

• Evaluating the impact of government price controls, minimum wage, price supports, and production incentives.

• Determining how taxes, subsidies, tariffs, and import quotas affect consumers and producers.”

This excerpt from Robert S. Pindyck and Daniel L. Rubinfeld proves that supply and demand model had wide implications. Almost all kind of managers need to understand this model as:

1- Being manager of a company which produces products in local as well as international market, it is most important to learn how prices are governed in the global economy.

2- Being a public or private manager, we may need to learn whether the government should control prices or not. If at all the prices are controlled by the government what kind of results you may expect.

3- Minimum wages are favorite tool of most of the governments. What impact they can bring on production, costs and efficiency of allocation of resources.

4- Similarly, we can’t understand affects of price support, subsidy, ceiling and floor pricing, quota, taxes, tariffs etc without understanding supply and demand model.

Is law of Demand a Law?

Origin of Supply and Demand Model

Supply and Demand Lesson

Why Demand Curve Slopes Downwards?

When Demand Curve Slopes Upwards?

Elasticity Definition

Price Elasticity

Price Elasticity of Demand

Measurement of Demand Elasticity

Point Elasticity of Demand

Income Elasticity of Demand

Applications of Income Elasticity of Demand

Cross Price Elasticity of Demand

Supply Curve and Elasticities

Perfect Price Elasticity of Supply

Relative Elasticities and Inelasticity of Supply

Exceptions to Demand and Supply

Consumer surplus

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