At the most basic level, a business exists to supply services or products to meet customer demand. Supply is the number of products or services a business is able (or willing) to sell to customers. Demand is the number of goods and services a customer is willing to buy, and at what price. Supply and demand are not completely controlled by a business. Supply is controlled by the suppliers, and demand is controlled by the customers. Supply and demand affect the price a business should charge for a product or service. Products and services which are in low supply will often cost more to compensate. A stable business will have enough supply to meet most of its demand.
It may seem like a good idea to have a much larger supply than demand. This is called a surplus. A surplus seems like a good idea, however, if products aren’t purchased, they go to waste. Waste is almost always bad in a business because products cost money, and products wasted is money wasted. Inversely, a shortage is when the demand for a product or service is greater than the supply. During a shortage, you are able to charge more money for the same product, however, you miss out on potential customers. Having a shortage or a surplus is bad. Finding a place in between where the majority of the demand is met, or there is little waste is an ideal situation.
Finding the perfect place between surplus and shortage is called equilibrium. There are two main factors that should be considered when trying to find an equilibrium: price and quantity. The price needs to be cheap enough so most customers are willing to pay for your product or service, but not too cheap that you are losing money. The quantity needs to be high enough so the product is available for most customers who want it, but not so much so that there is waste. Equilibrium is different for each business, however, once your equilibrium has been reached, you can maximize profits.