Judging from a lot of emails I receive, some people don’t get the concept of supply and demand. They may nod their heads and think they have it but here is a classic presentation to get the lesson home. It is a different set of concepts from manners and stimulus but it isn’t a hard concept. It should be helpful for those of us trying to start up a business in this economy (and whatever name you want to call it, it is a Depression we are in).
Let us say that you are sitting in a chair and you have just come out of the desert. You were there for two days and two nights. You are lucky to be alive (though dehydrated) and glad to enter a restaurant. Health issues aside, how much would you pay for a glass of water?
Let us say that you had $10,000 in your pocket. If you are from the European Union you can substitute it with Euros or whatever you want. How much of that would you pay for that nice bubbling cool glass of water?
Even if you wouldn’t pay the full $10,000 you still might pay a $1000, right? How about $2000? Okay, so you get a glass and you are happy.
The waiter pours you a second glass, how much would you pay for the second glass? Maybe not as much as the first but still you might pay $500.
By the fifth glass you wouldn’t be wanting to pay so much for the water anymore, would you?
What would happen if the waiter said after the first glass, “Sorry, we are out of water.” Maybe the pipe to the sink or faucet broke or maybe the place you were getting water from ran dry.
If you are still hot and thirsty you would pay a lot still for that water, wouldn’t you? If you weren’t so thirsty you might just shrug your shoulders and end up ordering a sandwich. Having the supply line in place is just as important as having the client or customer ready to get your product. Maybe you would start looking to get moisture from a cactus or a rock to satisfy your thirst. Maybe you would get sick and tired of plain water and want something with sugar or flavor in it.
That in a nutshell (or should I say in a glass of water?) is how supply and demand works. Just substitute the glass of water with anything in the marketplace and substitute your thirst for people and their thirst for getting the product.
Why do drugs sell so well? Their addictive nature makes them a self-driving demand mechanism that chemically makes you want them. No matter what the item is, eventually the demand will diminish (unless you are super addicted to something – like chocolate-and even then you need to watch it more than ever) and you won’t want to pay for the good/service as much as you initially did. By the fifth glass of water your stomach could be full, you may want something to eat, etc.-things like that.
When planning your business or behaving in business, always remember that part of economics is really simple. If you make or sell something that people want or crave (or can create an artificial need – like iPods) you will have a great shot at making money in the marketplace. I am going to get myself a glass of water now and hopefully not have to spend $10,000 on it. At least, not yet..
March 25 2009
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Kim Isaac Greenblatt
Crash Course On Supply and Demand
