When we are dealing with buying and selling items the simple profit function isn’t nearly enough, especially when owning your own merchandising business. Today, businesses have the resources to purchase exports from other countries as their primary inventory of products and this is where the Supply and Demand equation comes in. Supply and Demand is an economic theory in which we can determine the equilibrium point where the demand and supply break even. This is important because when the demand is greater than the supply there is a shortage in inventory and if the supply is greater than the demand then there is a surplus in inventory. So as a merchandising business owner, we must always purchase our inventory as close as we can to the equilibrium point.
In the demand equation, q represents the quantity of demand as it is measured usually in sales. The demand curve equation is expressed in the format of Q=a-bP in which a is the point on the y-intercept that is the given fixed cost which may represent the most anyone would pay for that product, b is the slope that represents the “law of demand” which means that more people will theoretically buy more of the product or service as the price goes down, and P is the price. If the consumer pays less than they expect to pay, they will enjoy a “consumer surplus” of the difference between the expected price and the actual price paid for that product. If controlled, this may actually be used as an incentive for consumers to buy from your establishment which is proven by Walmart’s successful business model. In the supply equation, p represents the price of supply as it is measured in the currency you are doing business in. The supply curve equation is expressed in the format of P=a+bQ in which a is the point on the y-intercept that is the given fixed cost which may represent the “cost of production” or the least price a producer would be willing to sell that product, b is the slope that represents the “law of supply” which means that the greater the price the higher quantity of products given, and Q is the quantity.
For example, if the demand for your custom shoes is Q=1600-40P shoes sold per day and the supply is P=-200+20Q we first substitute the unknown variables by a common variable of P and equate the two equations like so, 1600-40P=200+20P and solve for P. This simplifies to 1800=60P in which P and the equilibrium point equals 30. Therefore, if we substitute the equilibrium price for the demand equation as such, 1600-40(30), the demand is 400. We know the answer is correct if we substitute the same equilibrium price for the supply equation as such, -200+20(30) and we once again come to the conclusion of 400. Which means that if we purchase more than 400 shoes we will have a surplus of inventory and if we purchase less than 400 shoes we will have a shortage of inventory.
