Business Economics for Entrepreneurs

Make Supply and Demand Work for Your Business

Written by Clayton Reeves for Gaebler Ventures

Understanding the pushes and pulls of supply and demand can enable you to create a business model suited to your company's strengths. This article briefly goes over how simple economics can play a real life roll if your business planning.

Supply and demand are two of the most obvious forces of economics that can either work for or against your business.

At the most basic level, supply and demand control whether or not your business will succeed. Things like revenue, customer retention and operating profit all depend on supply and demand. Everything from sales, marketing and risk management relate back to the cycles of supply and demand.

If you understand this, then you can better position your small business to take advantage of increases in demand, and protect yourself from decreases.

When I worked in retail, the forces of supply and demand were never more obvious. If there was a problem with supply, I would hear about it from angry customers who expected the shelves to be stocked. If we weren't selling enough, I would hear about it from my managers, who would insist that I become a better salesman.

For those of us with small businesses, it is important to play these sides for our own business. It is easier for a small business to control the tides of supply and demand than it is for a floor salesman to control sales.

You may remember from econ class that supply and demand depends on things like income, availability of substitutes and market trends. As income increases, luxury items become more attractive. What category do your small business' products fall into? Are they a luxury or necessity?

In addition to income, it is important to determine what the greatest substitute threats are in your industry. In the current economic environment, things like income elasticity come into play. Having a system to assess and hedge against these sort of risks are important to any company.

An easy way to think about this supply and demand problem is to think of demand as marketing, and supply as production. It is the job of marketing to create demand from their practices and programs. Marketing must produce advertisement campaigns, sales initiatives and motivation for the sales force to excel.

Supply is more of a manufacturing problem. How much of your product do you offer your customers? Is there any scarcity in these goods? The first decision in determining supply should be the abilities of your production facilities and your lowest average total cost. Then match this up with demand and decide how much of your product to produce.

As a small business owner, it is easier to make command decisions regarding supply and demand. Enable your sales force to make the moves they need to and make sure you leave your customers happy.

Working in retail offered me some insights about the applications of supply and demand. The most important thing to remember is that you don't want to sacrifice customer service simply to make a few extra pennies. As a small business, you must foster the relationships with the customers you have.

When he's not playing racquetball or studying for a class, Clayton Reeves enjoys writing articles about entrepreneurship. He is currently an MBA student at the University of Missouri with a concentration in Economics and Finance.

Share this article

Additional Resources for Entrepreneurs

Lists of Venture Capital and Private Equity Firms

Franchise Opportunities

Contributors

Business Glossary