In 2007, my business partner and I decided to get into the business of selling different types and brands of glasses. We purchased 1,000 glasses a month at about $4 a piece and the goal was to sell all the glasses every month. The price for these glasses started at $40 each. Based on our research on sites such as craigslist and ebay, we realized that the demand for shades was pretty high, in spite of this, our sales were very low. We experienced a big surplus since we had way more inventory than customers wanting to buy our glasses or more supply than demand. Surplus is the extent to which generation of goods, services and resources (such as capital) exceeds their consumption.
After doing a bit more research, we decided to use different marketing tools and strategies to see if that would help improve sales and had no luck. We then started looking at our competitors and realized that not only were they having more success that us, but their prices were much lower and it was then when we realized that lowering the prices could be a solution.
My partner and I decided to play with the numbers a little. During holidays, we offered 75% discounts so customers could buy a pair for $10. The first trial was close to Christmas and within two weeks all shades were sold so we then realized that if we were to continue these holiday sales, we would experience shortage or have less supply than what is demanded. An economic shortage is a disparity between the amount demanded for a product or service and the amount supplied in a market. Specifically, a shortage occurs when there is excess demand; therefore, it is the opposite of a surplus. In order to reach our equilibrium point or the point where our supply met the demands for our particular shades, we went back to our $40 price and then brought the price down by $4 every month. By the 4th month, prices were dropped to $24 per pair and that month we were able to sell 500 pairs by the end of the month which was a pretty good return on investment.
This was the point when we reached our market equilibrium. Equilibrium is a situation in which the supply of an item is exactly equal to its demand. Since there is neither surplus nor shortage in the market, price tends to remain the stable in this situation. Equilibrating Process is “the interaction of market demand and market supply adjusts the price to the point at which the quantities demanded and supplied are equal”, known as equilibrium price. The corresponding quantity is the equilibrium quantity. A change in either demand or supply changes the equilibrium price and quantity (McConnell, Brue, & Flynn, 2009).
Through this experience, my partner and I learned a valuable lesson and that is that customers control the market and if you make things affordable enough, the demand for that particular item will always be there. We found that rather than 1000 pairs per month, 500 pairs was the actual quantity based on our demand.
McConnell, C. R., Brue, S. L., & Flynn, S. M. (2009). Economics: Principles, Problems, and Policies. New York, NY: McGraw-Hill/Irwin.