Supply and demand

How to supply and demand interact?

Supply and demand are intrinsically linked. These two factors shape the price of the offering. When supply and demand intersect as shown in the graph below an equilibrium price or market clearing price is reached. The equilibrium price is where production and consumption can both be equally satsified (Econolib.org 2016). The customer may long for lower prices and the seller may wish for higher but both are dictated by the laws supply and demand, respectively. If the price on a good were to rise, demand will wane, which will lead to a surplus and force the price lower to clear stock. If the price on a product falls, producers will be less likely to supply it causing a shortage, driving up demand and thus driving up the price (Futures.tradingcharts.com. 2016).  

    

For a pretty breezy break down check out the video on supply and demand from the always wonderful Crash Course https://www.youtube.com/watch?v=g9aDizJpd_s

What factors affect the ability to supply a commodity?

• Price
• Price of other goods associated
• Technology
• Natural Events
• Production costs
• Expectation of producers
• Public perception and pressures

As shown on the left side of the supply and demand mind-map, the above factors are the drivers of supplying a commodity.

What factors change demand for the commodity?

• Price
• Prices of other goods
• Substitutes
• Compliments
• Income
• Tastes and fashions
• Level and structure of population
• Advertising
• Expectation of consumers

(Baffled Bee 2016)

As shown on the right side of the supply and demand mind-map we find the factors that drive demand in commodity markets. As one of the driving factors of demand is price, we should talk about how the prices of commodities are managed. Commodities are traded in commodity markets as future contracts for goods. The prices of these futures are derived from buyers evaluating the factors listed above and bidding on these future contracts. These contracts help insulate both parties form the volatility of the cash commodities market. These cash markets often run parallel to the futures market, but not always. Unexpected forces can wipe out crops or lead to a glut of product, thus the futures market can is designed to take some of the sting out of these fluctuations (Reem Heakal. 2003).

For more info on commodity futures check out https://www.youtube.com/watch?v=CC9VeHrI3Es

How to maintain profit when engaging in price competition?

In order to maintain profit during price competition we should refer back to some of the information we touched on in the post from September 19th, specifically Michael Porter’s generic competitive differentiation strategy and vertical integration. Instead of referring back to the same sources or finding other sources that say the same things, I thought we could look at the strategy of a midwestern American gas station chain. As the largest consumer of oil in the world, the business of selling gasoline in the U.S. is fiercely competitive, dominated by huge chains owned by gigantic oil manufacturers. How did Kwik Trip a small town, privately owned, Wisconsin gas station gain the 12th spot in Convenience Store News’s “Top 20 Growth Chains List” for 2015 (Convenience Store News 2016)? Through both differentiation and vertical integration. Unlike its competition, Kwik Trip offers hot food at a reasonable price. So much so that it accounts for a third of the company’s annual profit (Vault 2016). Kwik Trip has it’s own dairy facilities, bakeries, bottling facilities and distribution centers. In addition to its food divisions, Kwik Trip runs its own security services, manufactures its own packaging and handles its own gas production. All of these processes make for cheaper products, with a higher level of quality, to help offset fluctuating demands for gas and tobacco. By upping quality and driving down prices, while maintaining a customer focused approach, Kwik Trip has become a become a regular stop for 6 million weekly visitors (Thompson 2015)

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Sources:

Baffled Bee. (2016). AS Microeconomics. [online] Available at: http://www.baffledbee.co.uk/as-microeconomics.html [Accessed 3 Oct. 2016].

Convenience Store News. (2016). Top 20 Growth Chains. [online] Available at: http://www.csnews.com/top-20-growth-chains [Accessed 3 Oct. 2016].

CSP Daily News. (2007). Only at Kwik Trip. [online] Available at: http://www.cspdailynews.com/industry-news-analysis/corporate-news/articles/only-kwik-trip [Accessed 3 Oct. 2016].

Econlib.org. (2016). Supply and Demand, Markets and Prices, College Economics Topics | Library of Economics and Liberty. [online] Available at: http://www.econlib.org/library/Topics/College/supplyanddemand.html [Accessed 3 Oct. 2016].

Reem Heakal. (2003). Futures Fundamentals: The Players | Investopedia. [online] Available at: http://www.investopedia.com/university/futures/futures3.asp [Accessed 3 Oct. 2016].

Thompson, P. (2015). CEO predicts another 50 years of Kwik Trip growth. [online] La Crosse Tribune. Available at: http://lacrossetribune.com/news/local/ceo-predicts-another-years-of-kwik-trip-growth/article_187b9aad-b8aa-596c-a282-c404b83169cb.html [Accessed 3 Oct. 2016].

Vault. (2016). KWIK TRIP, INC.|Company Profile|Vault.com. [online] Available at: http://www.vault.com/company-profiles/retail/kwik-trip,-inc/company-overview.aspx [Accessed 3 Oct. 2016].

Futures.tradingcharts.com. (2016).How Supply and Demand Determine Commodities Market Prices. [online] Available at: http://futures.tradingcharts.com/learning/supply_and_demand.html [Accessed 2 Oct. 2016].