Law of Supply and Demand: How It Affects Rising Prices?
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Law of Supply and Demand: How It Affects Rising Prices?

The Law of Supply and Demand generally affects the rising prices of certain commodities in the market. The increase in price is related to inflation and the economy as a whole. Price increase plays an impact to companies and even individuals. Prices should be controlled at a certain level through a balance in supply and demand known as equilibrium.

Supply and Demand are among the basic economic terms that play vital roles in the economic society we are in. The Law of Supply and Demand has always been and will always be the basis for the prices of certain commodities.

Supply refers to the quantity the market has to offer while demand refers to the purchasing power the buyer intends to acquire in the market. The Law of Supply and Demand generates the following basic concepts, assuming all other factors remain constant;

  • If Supply is higher than demand, prices will usually decrease
  • If Supply is lower than demand, prices will usually increase

If prices increase because of lack of supply, suppliers tend to speed up production and produce more to gain more profit. On the other hand, if prices decrease, buyers tend to purchase even more for future use or as a substitute from other products at higher prices. In both cases, when supply and demand are balanced with each other, it will create an equilibrium price.

In line with supply and demand, there are certain factors that affect the rising prices of commodities. Among the factors that affect the fluctuation of prices are the following:

Monopolistic Competition

The supply of goods and services such as utilities with a little range of competitors affects the rising prices of these items. The supplier has the capacity to fluctuate prices at certain level without considering the demand of their products and services. The ability of the consumers to choose the right supplier can persuade the prices to decrease if wide range of competitors is available.

Hoarding

Hoarding happens when suppliers hold certain commodities with the intention of gaining more profit in the future. Hoarding decreases the supply of resources, thus resulting to rising prices. If prices increase, suppliers then will decide to release the stocks available for sale.

Fuel and Energy Prices

Fuel and Energy Prices are the most common factors when it comes to rising prices. Most commodities especially supplies that are generally transferred from one place to another are in the same way affected with the supply and demand of fuel and energy. Most companies rely on fuel and energy for production purposes. Even service companies survived because of the availability of fuel and energy resources.

Inventory Management

The general practice of certain companies in Inventory Management System affects rising prices. The COGS (Cost of Goods Sold) of products affect their prices. FIFO (First In, First Out) or LIFO (Last In, Last Out) can determine the COGS.

 

Stock Market

The law of supply and demand can also be patterned with the movements of stocks in Stock Market. In the same manner, the fluctuation of Bid (Buy) and Ask (Sell) prices depends upon the quantity of supply and demand of traded stocks between investors.

Inflation and Economic Growth

Companies usually adapt to the growth of the economy. If cost of goods manufactured increases, there is no other option but to increase the prices of finished products for sale. A specific country will implement a certain pattern of inflation to adapt not only to the specific economy but to the global economy as a whole to sustain the planned growth.

Marginal Profit

The quantity demanded for the products of a company determines the supply to produce that certain products. If the company decides to target a certain level of marginal profit, it will usually result to the rising prices of the products.

Import and Export Policies

Supply and demand of certain products imported and exported from or to other countries is governed by specific Importation and Exportation Guidelines. The policies should be strictly followed in order to avoid the delay of the transfer of products from a country to another. The delay in the process will affect the general price increase not only for imported or exported goods but also with the local products as well.

Money Circulation

Too much money supply in a certain country affects the rising prices of goods. If the money circulated continue to increase and exceeds more than the available supply of goods available for sale, price increase will happen.

Population Growth

The growth in population will result to an increase in demand. If demand will continue to increase, and the supply will not be able to cope up with demand, there will be price increase for certain commodities.

Economists analyze the growth of an economy as it affects the general prices of products and services. Their aim is to sustain this growth and plan some procedures in order to balance supply and demand to minimize rising prices and reach equilibrium. 

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Comments (2)

A well rounded article.

Thanks for your support Peter =)

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