First things first: What is “Supply and Demand”?
“Supply” is the amount of goods (or services!) available.
More stuff = More Supply.
“Demand” is how badly / how many people want that good (or service).
More People Who Want the Good = More Demand.
People Want the Good Really Badly = More Demand.
Both Supply and Demand affect the Price of a good (or service).
Rating: Intro to Economics
As per usual – this’ll make more sense as we walk through some examples! I’m really feeling the autumn vibes, so we’ll be using examples inspired by fall today.
Example 1: A Lesson in Demand via a Discussion Regarding Pumpkin Spice Lattes
A lot of people love the Pumpkin Spice Latte. You probably know someone who abandons their typical coffee order each fall and drinks exclusively Pumpkin Spice Lattes. If you don’t know someone like that, you do now (I am she).
Because people go so crazy about PSLs in the fall, coffee shops know that there is increased demand. Remember, if a lot of people want an item, it is in “High Demand”.
If you take a look at a Starbucks menu, you will notice something interesting. The Iced Pumpkin Spice Latte is significantly more expensive than the standard Iced Caffe Latte. At a Starbucks near me, the difference was $1.20 before tax – the PSL is almost 23% higher!
Now you may be thinking to yourself, “This isn’t really a fair comparison! The PSL is flavored and the regular Caffe Latte is not. Surely that’s the difference.” However, the simple fact that the PSL is flavored is not the difference. Let’s compare it to an Iced Cinnamon Dolce Latte.
The Cinnamon Dolce is still more expensive than the normal Caffe Latte, but it’s less expensive than the PSL by $0.50. This is an example of the Demand for an item increasing the price. The PSL and Cinnamon Dolce lattes are very comparable products, but the good ‘ol autumn vibes make people crave that pumpkin spicey flavor.
Now let’s talk about how Supply affects price and how Supply interacts with Demand!
Example 2: A Company Heavily Rooted in Supply and Demand Strategy – Spirit Halloween
Saltina and her partner want to be Batman and Wonder Woman for Halloween. Because she’s super organized and a queen, she decides it’s best to start shopping and get her costume ahead of time.
She visits a weird, old, usually-abandoned fabric store and finds this beaut in its place:
Eager to find her Wonder Woman costume early, Saltina decides to go in and shop. She finds a great costume for herself and spots a Batman costume for her partner! They’re both reasonably priced, and there are plenty in stock.
Another lady walks up and decides to look at the Wonder Woman costumes as well. Luckily for Saltina, there are 10 in stock – more than enough for them both to get one.
On October 1st, the Supply of Wonder Woman costumes is high. Everyone who wants one can get one. Let’s see what happens when it gets closer to Halloween.
Saltina’s partner, Bartholamew, is less organized. He waits until the very last second and goes shopping for his costume the day before Halloween. Unfortunately for Bartholamew, there are no Batman costumes at the first Spirit Halloween he goes to – they are already sold out.
After driving 30 minutes to the next nearest Spirit Halloween, he marches in full of hope… only to find that they, too, are sold out of Batman costumes.
There is one more Spirit Halloween in the area, but it’s another 20 minutes away. With just one day to find his costume, he can’t spare any more wasted time. He decides to drive to a third store and prays they have it in stock (Saltina told him weeks ago that he should buy his costume early and he didn’t listen to her).
At last, the third Spirit Halloween boasts a glorious 2 Batman costumes available. Remember, Bartholomew really wants this costume, so his Demand for Batman costumes is high right now. Also, because the other stores were sold out and this store only has 2 available, the Supply of Batman costumes is quite low. Spirit Halloween knows that they can make some extra money based on this information, so they charge a much higher price.
Desperate, Bartholomew decides to pay the $100 price tag, even though he knows Saltina saw it for $75 just a few weeks earlier. Right as Bartholomew grabs the costume from the shelf, another two men walk up and begin fighting over the one remaining costume. One man quickly snatches it from the shelf, and the other man naturally, freaks out. He looks to Bartholomew.
“Please, dude! My friend group decided to go as the Justice League for Halloween! If I can’t go as Batman I’m going to have to go as Green Lantern, the objectively lamest member of the Justice League.” Devastating. He continues:
“If I pay you $50, can I take that Batman costume from you?” The sad, desperate man pleads with Bartholomew. This man is willing to pay a whopping $150 total for a costume that was once $75! Why?
Because the Supply is low (only 2 costumes left…), and the Demand is high (3 people, maybe more, want them).
Don’t worry friends, Bartholomew declined the man’s offer, purchased his overpriced costume, and had a wonderful holiday with Saltina.
The sad man had to go as Green Lantern though, so that does suck for him 😦
The day after Halloween, Saltina and Bartholomew go to Spirit Halloween to buy some discounted candy. To their surprise/horror, the costumes have been marked wayyyy down.
The store received a late shipment of costumes November 1st. Now they have too many costumes and no one to buy them! Because they have more Supply than they need and the Demand for costumes plummeted after Halloween, Spirit Halloween discounted prices in an attempt to sell these costumes.
Now I want you to think back – how long after October 31st does Spirit Halloween stay open? When Demand for Halloween costumes decreases to a certain point, these stores evaporate from thin air and turn, once more, into the dormant old craft stores they are 75% of the year. Supply and Demand affects Spirit Halloween’s prices (and thus, their sales) so heavily they only pop up when Demand is high!
This leads me to my final point – the MAIN point! – of this article.
Low Supply and High Demand = ↑ Price
High Supply and Low Demand = ↓ Price
This article is rated “Intro to Econ”, so we’ll stop here, but if you’d like to keep learning about Supply, Demand, Price, and the balance we call ‘Market Equilibrium’, here is a great video I recommend:
Let’s summarize!
- Supply is the amount of stuff available
- Demand is how many people want the stuff (and how badly they want it!)
- If there is low Supply and high Demand, the price will likely be quite high
- However, if there is high Supply and low Demand, the price will be lower
- There is a relationship between Supply, Demand, and Price, and they impact each other
- You should go ahead and get your Halloween costume early
References:
Fernando, J. (June 27, 2024). Law of Supply and Demand in Economics: How It Works.
Investopedia. https://www.investopedia.com/terms/l/law-of-supply-demand.asp
How to understand and leverage supply and demand. (2024, July 11). MiroBlog.
https://miro.com/blog/supply-and-demand-diagram/
Perkis, D. (March 1, 2021). The Science of Supply and Demand. Federal Reserve Bank of
St. Louis. https://www.stlouisfed.org/publications/page-one-economics/2021/03/01/the-science-of-supply-and-demand
Khan, S. ( (January 2, 2012). Market equilibrium | Supply, demand, and market
equilibrium | Microeconomics. Khan Academy. https://www.youtube.com/watch?v=PEMkfgrifDw
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