Supply and Demand Curves Explained for Small Businesses

Hey, everybody, it's Mike Andes here and you're listening to the Business Boot Camp podcast. Today we're talking about something that stuck with me since my MBA classes back in business school. And one of the few things that stuck with me. So I'm gonna save you tens of thousands of dollars and a lot of money by just sharing with you now. It's something that I think about every day when it comes to business decisions, pricing decisions. And I think if you can grasp this concept and I can simplify enough for you, that you can really learn a lot in your business, in your small business, making decisions. And so we're gonna jump. Before we do, I want to say a big thank you to today's sponsor, which is Gusto. If you haven't Already, go to gusto.combootcamp Try out their software completely free for 90 days, where you can do automatic payments directly to your employees. And you can do benefits, whether it be health benefits or college savings credits, all that good stuff to your employees. Very simply on their app, they can see what their deductions are. Check it out Today, go to gusto.combootcamp. alright, so the supply and demand curve. That's what this is called. I still remember doing this with my professor back at my MBA courses, and one of the things he said was, if you ever want to sound really, really smart in front of a bunch of people, just say, just look at them. Be like, supply and demand. And you're always right. Cause everything revolves around supply and demand. Now, I've actually already recorded this video three times. Every single time I have to stop, though, because I kept just getting too much in the weeds on this diagram. So I'm gonna try to keep this as simple as possible and not make it too complicated because there's a lot of things you can draw on this and get a lot of information and reference. If you are interested in that, let me know. Maybe I'll make a more detailed video that's really in the weeds. But I just want to give you enough information on the supply demand curve for you to kind of get some really good information that I always think about. So first things first. This is called the equilibrium price.

Equilib. I'm just going to equal price equilib price. This is where the transaction happens. Okay, so this supply and demand curve is for everything. Like what determines the price of a stock is supply and demand. If a lot of people want that stock, the price will go up. In other words, if the demand goes up, the price goes up. So over Here we got price. Over here we have quantity. For something like a stock where the number of shares is the quantity, there's a fixed quantity, which means if the demand goes up, the demand goes up. Right here, demand's going up, price is going up. So this affects the stock market, it affects the housing market, it affects the price of every single thing you buy. Okay, so we're gonna go over that in just a second here. I try to contain my excitement. Cause I really do enjoy this stuff. It's a lot of fun. All right, so this is where the price happens. This is where the transaction takes place at the equilibrium price where demand and supply curve meet. That's where equilibrium price happens. Now what can happen is the demand curve can shift or the supply curve can shift. Okay? So you ask yourself, well, how does the housing market.

How is the price affected? Well, two different things that happen. Either one, the supply. In other words, how many houses are on the market that could change? Or the demand, if no one wants to move, guess what? Housing prices go down. Why? Because the demand is going down. As demand goes down, price goes down. As supply goes higher.

Price goes down. So these are things that we've got to think about, we gotta look at now. Graph on this graph here. Alright, so let's talk about a surplus. Okay, so a surplus is any time when supply is way greater than demand. Here, we got demand way down here, supply is way up here. Obviously there's not a transaction happening. So what happens? Well, in order for us to actually make this transaction go through, we've got to sell at a very, very low price. Because remember, as supply goes up, price comes down. Alright, so as I keep going higher and higher over here, in order for the transaction to take place, as I go up and up and up here on my supply where I'm meeting at, the demand is going down and the price is therefore reducing. So up here I have what's called a surplus. So let's go ahead and write that down in blue. We got a surplus up here. What that means is surplus. What that means is there is too much supply. Another example, potatoes. In the pandemic, farmers have literally been digging massive holes and bearing their potatoes. Why? Because there's a massive amount of surplus. That is, there's a whole bunch of supply, a whole bunch of potatoes. No one needs the potatoes because all the restaurants have been closed and food service is a massive part of fries and all the other stuff that we eat with potatoes, massive amounts of surplus. They've been literally taking tractors and tilling all this cabbage back into the soil. Why? Because there's a massive surplus. There's a ton of supply, not enough demand. Now, when we think about the housing market, let's think about this for a second. We talk about surplus. We talk about potatoes being way too high in the supply chain. Too much supply and the demand being way too low. Now let's talk about if we have a shortage. What happens if we have a shortage? Draw down here. So this is again our supply line right here. This is the number of houses, the number of potatoes in the market, the supply on the marketplace. Now let's talk about down here. This is going to be a shortage because now there's not enough supply. So let's talk about what's happening right now in the housing market. So right now houses are going on the market, and the next day they have five offers and they're going way above asking price. Why? Because the interest rates are lower. And so people are buying houses, and a lot of people are buying houses. What's happening? The demand is going higher and higher. As the man gets higher and higher and higher, price goes up, price goes up. And so because now there's a shortage, there is a shortage of supply. What happens is, in order for this transaction to go place, we got to go all the way up here. Now price becomes extremely expensive.

Okay, now here we have a house.

Lots of houses in the market. 60 houses on the market right here. If we drop from 60, this is the amount of quantity. Quantity on the bottom here. 60 houses on the market. Price is at, let's say, $250.

But now there's less houses on the market. And not only is there less houses in the market, there's more demand. It's a double whammy. And what happens? Price goes through the roof. Okay, now how can you artificially create a shortage? You think about Ferrari or Lamborghini and these other car makers, they make 10, one of a kind vehicles, I guess. Not one of a kind. Ten of a kind. There you go, 10 vehicles. And they're all priced like $5 million a piece. Why is that? Because the quantity is low. And when the quantity is low, the supply is low and demand is very, very high, you get a premium price. Now, if Lamborghini or Ferrari went out and said, you know what? We make so much money on those 10 cars, let's go make 100,000 of those cars instead of 10, let's make 100,000. Guess what? They wouldn't make a lot of money. Because as soon as you increase the supply, the demand's going to come down because you increased quantity. So you increase quantity, demand comes down and supply goes up because you added more. As we move across in quantity, supply is going up, but demand goes down. And when you find that intersection, boom, boom. We look over here, lower price. Very, very interesting. And I know there's a lot of things, I'm just kind of glancing over here right now, but in this equilibrium, price is where demand equals supply.

And guess what? Every time a transaction takes place, it's moving. This equilibrium price. This is something you want to think about all the time. Because when it comes to you maximizing your profits. Now let's talk about this. This is where it gets really interesting and actually changes your business. This is the thing you gotta ask yourself, well, if I can just reduce my quantity, I can become more rare, I can increase my price. How do you become more rare? You become better than everyone else. Because guess what, if you're better than everyone else, there's a huge demand for you and there's a low supply which drives the price higher. Higher. If you're in a market where there's a lot of competition, lots of supply, it reduces the demand for your product or service. If we have lots of supply, it reduces the demand. Low demand. Okay, now I want to show a little bit about price elasticity. And I know, whoops, never do you want to erase demand.

Now I want to talk about how this actually affects your business when it comes to pricing and figuring out where do you make the most money on this chart. Because guess what, like I just said, Ferrari makes more money selling less cars and creating artificial.

Low levels of supply. That's how they do it. Low levels of supply equals high demand equals high price. Alright? So now the question is this. If I have.

I'm a car maker, I say, hey, look, okay, we want to get as much profit as we possibly can. So we're gonna make, let's say 70 cars, alright? So there's 70 cars right there.

Boom. Okay, and if we draw the lines, they made $200 per car, alright? So I'm going to erase this a little bit more. So we're making 70 vehicles and we're going to assume that every single one is $200. So $200 times 70 equals $14,000 in revenue.

Now let's assume, let's assume that 50% profit on that. So we got $14,000 in revenue. We got 50% of that is profit. So we got $7,000 in profit. Boom. That is our point. All right?

Now, what if.

We move the supply curve here? In other words, we take this line and we move it this way artificially by reducing the quantity. In other words, instead of making 70, instead of doing 70 cars, we're only going to produce 30. So we're like, you know what? We're only going to do 30 cars. You know what? Let's do 40 cars. We're going from 70 to 40. Now, if everything else on the market is held consistent, we're going to only create. We're only going from 70 cars to 40 cars, and demand stays the same. That's the big key here. So if we go 70 to 40, what's going to happen? Well, we sell 40 cars.

But because there's less in the marketplace now.

We now sell them for $400 per car. Okay, so now we're doing four, 40 cars, $400 per car. Now, the revenue at this point is going to be actually greater.

How is this possible? We're making $16,000 in revenue instead of $14,000 in revenue, and yet we're making almost half as many cars. And assuming that we have a 50% profit margin, we are going to profit $8,000 in profit. We're actually going to make more money by producing less cars. How do we do it? We simply reduced quantity.

This is something that's really, really fascinating because you got to ask yourself, well, I want to raise prices. Okay, well, if you're going to raise prices, you need to do one of two things. You either need to reduce supply because as we reduce supply, we increase price, or you need to increase demand, because as we increase demand, we increase price. So how can you. This is the question you gotta ask yourself, how can I create greater demand for my product? Guess what? That's what marketing is. Advertising is. You're trying to create demand for your product. Now, you can also do it by being better than everyone else. Having a unique selling proposition. If you call people back the same day and all of your competition is calling back the next week, if you come to a potential customer's house with uniforms and are professional and you're insured and you're bonded and your employees are trained and they're professional, guess what? You have a greater demand for your service. And guess what? If all of your competition can't compete with you on those things, the supply of your level of professionalism and level of service goes down. And remember, as supply goes down, price goes up. Just like the housing market.

As the supply goes down, price goes up. As the number of houses on the Market goes down. As the quantity goes down, the price is going up and up. Alright, so this is something you want to think about. If you're interested in more of a deeper dive in this, let me know. But always remember supply and demand. You can always shift demand. And if you shift demand, it's going to increase or decrease price. And same thing with supply as this shifts. So for example, let's do one more example. Let's erase these and do one more example. Then we're going to call it quits. Because I don't want to get too deep like I have in the past two attempts at this episode. Okay, that was there to show you that there is a certain level of profit maximization that comes with manipulating the quantity and the supply and demand. There's also something called price elasticity, which means I might not be able to charge $400 for that car, which means demand curves and supply curves are not necessarily straight. Something to think about.

So I might be able to charge $220 for my car, but as soon as I go to $250 immediately, my demand might just drop off. Which means that these aren't always straight. So keep that in mind. But now we've talked about how to maximize our profit. Now let's think about if we actually make move one of these lines. Because this is how this happens. So the supply curve. Supply curve is going to go this way. In other words, we're increasing quantity. What actually happens is this curve gets moved. So what happens? Supply moved. This supply curve moved. Now what just happened? What just happened? Supply went up. Our quantity increased. So what happened? Our equilibrium point moved from here to here. What happened? What happened? Our price just dropped. Alright, equilibrium point. This is where we were in the past, selling. What happened is the supply curve moved. The quantity increased, supply increased. The number of that product or service or your competition increased. Whatever it might be that supply increases, that shifts the curve this way. As you shift the supply curve to this side because of increased quantity, what happens?

This equilibrium point moves to here. And that is a reduction in price. Okay? And this is what we call a race to the bottom. Why? Because supply is just increasing and increasing and increasing. And there's more competition and everyone just keeps slashing their price and slashing their price. Why? It's a race to the bottom. There's too much supply, there's too many competition. Everyone's offering the same thing. You say, how do I break out of a race to the bottom? You can do one thing. You can differentiate yourself so that you Move the supply diagram this way, you move it that way. Now another way you can do it is you can lower prices. It's one way to do it. That's what Walmart does to cut out competition, to eliminate people, they just reduce price. You can also create demand for your product or service. All right, so the same way that we move supply chain this way, what if now we're gonna do the opposite? Instead of moving the supply curve, we are now going to move the demand curve. Alright, messing up this thing and maybe this is off, but I hope this helps somebody. You got supply. Alright, so we just moved supply. Now what happens if you change the demand for your product? What happens, what happens if we move the demand differently? We are now going to increase demand for our service. We are going to do marketing, we are going to make ourselves more professional. These are all things you can do by marketing. You increase demand because more people are calling and asking for your service. And all of a sudden, guess what? You get to a point, if you're really busy, you know what you do? You raise your prices. Okay, I'm gonna show that now on the graph again. Everything's supply and demand. You say, man, Michael, what did you do, drink coffee? No. I really am excited about this stuff. I think it's super awesome. I love it. It's very, very exciting. So we got our equilibrium point here. Boom. Equilibrium is right there. Now what are we gonna do? We are going to have a marketing campaign. We're going to train all of our employees, we're going to have better uniforms, we're going to change our website, we are going to improve our brand image and therefore we are going to increase demand for our products and service. Because guess what, we are a lawn care service and it's in the middle of spring and everyone needs their lawn mowed. And because everyone needs their lawn mowed, it increased demand. All right, so now, now what's going to happen is the demand is going to go up. Boom, boom. All the things I just mentioned, maybe just one of them we're doing. I'm just going to show an example here. So what happens? The demand curve moves up and when we move the demand curve, get another color here, we're going to move the demand curve here. We're going to make a lot of changes in the business. We're going to market, we're going to improve our service, we're going to increase the demand, demand. The spring, the grass is growing. Everybody needs their lawn mowed. What happens is now the equilibrium price is right here. No longer here. We shifted the demand, we increased demand. What happens? The equilibrium price is here, equilibrium moves here. And what has happened is the equilibrium has moved to this point right here. And this is price increase. Okay, so how do you raise your prices? You increase demand. How do you increase demand? You can either reduce supply or make yourself better by marketing, improving your product, service, professionalism, standing out from everyone else. That's what I think about. That is how I think about. When do we raise our prices? Well, when we have so much demand coming in, we can't even, we can't even handle all the calls, we can't hold all the new leads, we're just overwhelmed with work. Don't just stop answering your phone, let the demand keep on coming in. But raise your prices. Raise your prices and actually have a higher profit margin. Alright, so I can go on and on, show different examples, show surplus and supply shortages and all the rest of it. Don't want to get too deep into it, but I hope this helps you. It's a little bit bit more deeper content. If you enjoyed it, let me know in the comments below. Share it with someone else. And always remember, supply and demand.