Questions & Answers: Supply, Demand, Production Cost and Pricing
How do businesses decide what to make and sell?
Emily: Basically, businesses want to sell things that consumers like you and me want to buy. Here at the candy store, the owner has probably figured out which candies people like the most. He'll be sure to keep plenty of the popular stuff in stock because he knows it's gonna sell, and make him some money. Deciding what items to sell, and what they should cost has a lot to do with something called supply and demand.
What's supply and demand?
Isaac: Well, supply refers to the amount of goods, like candy, available to purchase at any given time. Demand measures how many consumers actually want to buy those goods. At a store like this, supply and demand affects things like what kind of candy is sold, and how much it's gonna cost you.
How does supply and demand affect prices?
Emily: If a particular candy is way popular, meaning the demand is high, it usually sells at full price because people are willing to pay it. If there's low demand for something—like if no one's really crazy about a certain candy bar, or it tastes really terrible—the store might try selling it really cheap. And even then people might not buy it. So most of the time, high demand leads to higher prices, low demand leads to lower prices. On the other hand, high supply—when there's lots of a product—usually means lower prices, and low supply—when there's not enough of an item—usually means higher prices!
What else affects how much stuff costs?
Isaac: Prices aren't determined by supply and demand alone. A product's price can be also related to the quality and cost of the materials used to make it. Take hand-made gourmet chocolates for example—they're going to be a lot more expensive than candy that's been mass-produced in a factory. That's because the gourmet candies use high quality ingredients, take more time to make, and there's less of a supply of them. All that makes them much more expensive. Plus they taste incredible… which is why people are willing to pay such high prices for them. But stores can only charge as much as their customers are willing to pay, so one of the biggest factors in determining the price is you—the consumer.
Emily: Yep. There are still a few more factors that affect price. The cost of running a store, paying the employees, the availability of the supplies used in manufacturing, even the weather! Say there was a drought in an area where sugar cane is grown, and the crop was ruined. That would cause a shortage in the sugar supply and, as I said before, low supply means higher prices. Since candy is made of sugar, if sugar prices went up, candy prices would too.