Summary
- When you need something, you are willing to supply something in return to fulfill that need (e.g., buying food with money earned from labor).
- Higher demand and low supply lead to higher prices, while low demand and high supply lead to lower prices. When demand equals supply, prices remain neutral.
- Understanding supply and demand dynamics is crucial for businesses to make profits and for investors to succeed in the financial markets.
If you need (demand) something, you are willing to do (supply) something to get that need. For example, if you desire food to survive, you will need money to buy food. You need to supply money to purchase the food you demand. To obtain the money you demand, you need to supply something, such as your labor or something you have to sell.
If you demand something that you really need or want, you are willing to pay a higher price for it. If a lot of people demand it, the price of that thing can increase as more people want it. If there isn’t enough of the desired item, prices can go even higher, and those with more money are willing to pay even higher prices.
Higher Demand & Low Supply = Higher Prices
Low Demand & High Supply = Lower Prices
Demand = Supply = Neutral Prices
Now, let’s consider a company. If a company knows that many people are willing to pay a high price for something, and the company can easily supply that item at a low cost, the company can make a nice profit.
Profit = Revenue From Selling Something – The Cost of Producing That Something to Sell
Now, let’s turn our attention to investments. If someone wants a stock, bond, commodity, real estate, or anything else, and there is more demand/buyers than supply/sellers at that time, the price of that investment will go up. Conversely, if people want less of something they have and there is more supply/sellers than demand/buyers, the price will go down at that moment in time.
The supply and demand dynamic is a simple concept, but to better understand market movements and the factors driving the prices of your investments, you need to understand this simple concept. Through this lens, you can then focus on the drivers of demand and supply within the investment universe. When you understand the drivers, sources, and reasons for the supply and demand for investments, of which there are many, you increase your potential for success as an investor.
Through Kulwicki Insights, I will attempt to provide clarity on these different factors that drive supply and demand so you can better distinguish market noise from reality.