Market Economics

To be profitable in any industry is very simple: generate more revenue than cost.  But, in reality, there are many factors that go into getting these numbers to come back with a positive bottom line. Marketing is thought of primarily as a firm’s advertisement strategy and efforts for a product or service but the marketing team has further-reaching consequences on a firm’s net income. Advertising efforts, in conjunction with an understanding of the quantity demanded in the market, allow for closer-to-optimal production levels. This edition of Marketing2015 will explore some theories of supply and demand and why the marketing team should be paying close attention.

Supply and demand is generally considered to be the main backbone and most fundamental concept of Economics, day one material in any 101 level econ class, micro or macro. As seen in the above image, price is on the Y-axis while quantity is on the X-axis. The demand curve starts high on the left and moves in a somewhat linear fashion toward the bottom right; the shape and direction of this curve is telling us that at a high price, consumer demand a lower quantity and that as the price decreases the quantity demanded will rise. The supply curve follows an opposite path: low on the left when price is low, and high on the right when/ where price is higher.  This concept makes a lot of logical sense: when prices are low firms are hesitant to produce many goods because the price will not offset the costs enough to turn a profit but when price is high, they are hoping to produce and sell a high volume of goods to cash in on people demanding their product.

The point on the graph where these two curves cross is referred to as the equilibrium point. This point represents the optimal price where consumers are willing and able to purchase all of the goods that producers are willing and able to make in any given market. This point is also known as the market-clearing price for the same reason. This is where marketers can have an impact on the bottom line.  If the marketing team is able to anticipate this sought-after point, it can be determined ahead of time what the likely demand will be.  Thus, the production team can create an appropriate production schedule that will allow for minimal overhead costs and ideally a complete avoidance of any unnecessary costs for thing like storing the extra, unsought goods, or having to wholesale a large number of them at a cost much lower than MSRP in an effort to at least see some return on the investment of producing them in the first place.

To delve a bit deeper into this concept we can begin to look at things like shifts of the curves, which occur when there is a change in number of consumers, the average income of consumers; and the preferences of the consumers or the prices of related good within the same market. There can also be movements of the equilibrium point along either curve.   These occur when there is a change in either value on an axis, price or quantity. These concepts would be covered in much greater detail if this were an economics blog.