Over the next two weeks, in a two-part series on the role of marketing, created for Caribbean360, Antilles Economics will discuss the role of marketing from an economic perspective. In this week’s article, the focus is on Marketing and the Theory of Demand and Supply.
By Stacia Howard
BRIDGETOWN, Barbados, Friday November 17, 2017 – One of the questions we’re asked is why are economists (yes, our founders are economists) doing market research and strategy? Some people take it one step further and suggest that we change our name to something without the word ‘economics’ in it, because no one looking for help with marketing would go to an ‘economics’ firm. Although their opinions are perfectly legitimate, we take a different view. Who better to support the work of marketers than economists? After all, marketers make their living executing an economic theory (the theory of demand and supply) and responding to consumer preferences and choices (one of the fundamentals areas of the study of microeconomics). In this first of two articles on the relationship between economics and marketing, we will look at Marketing and the Theory of Demand and Supply.
The theory of demand and supply is one of the oldest theories in economics, dating back more than 2,000 years. It is one of the defining theories of economics; it could be argued that the entire field of economics is built on this theory. The law of demand proposes that as the price of a good increases, the number of buyers willing to purchase it decreases, other things being constant. The law of supply proposes that as the price of that same good increases, the amount that suppliers are willing to offer increases, other things being constant. In short, therefore, as prices increase, there are fewer buyers but more goods available to be bought. Equilibrium is reached when both the amount willing to be bought and the amount on sale are the same; i.e. the market price is low enough to attract buyers but high enough that suppliers are willing and able to do business.
Now imagine that more buyers enter the market, resulting in an increase in demand. Suppliers will not immediately be able to provide more products. Buyers will, therefore, be willing to pay more than the previous market price to guarantee that they receive what will be becoming an increasingly scarce product. The new market price will now be high enough to attract new suppliers or encourage existing suppliers to provide more products because doing so would be profitable. On the demand side, as the price increases, the number of new buyers entering the market or the increase in amount that existing buyers are willing to buy will start to slow because the good is becoming too expensive, until eventually demand plateaus. As suppliers strive to sell more products, they need more buyers, so they will lower their prices to attract them. But if the price gets too low, suppliers will no longer be profitable, and some will drop out of the market or lower the amount being supplied. To remain profitable, prices will need to rise again. And this cycle of increasing and decreasing prices, increasing and decreasing demand and increasing and decreasing supply continues throughout a product’s life span.
Somebody had to take on the job of managing this cycle, and so birthed the function of marketing, or the act of going to market. Marketing goes beyond the passive role of a market observer, though observe and understand the market they must. They are the doers in the market; the ones seeking to establish that ever-elusive equilibrium price; the ones spurring demand to match supply; the ones communicating what is going on in the market to the rest of the firm. Hence, though the role of marketing has expanded and evolved beyond its original economic foundations, it is a function deeply rooted in an economic theory.
Stacia Howard is co-founder and Managing Director of Antilles Economics, a research and management consulting firm supporting insight-driven strategy through the provision of Market Intelligence, Economics Consulting and Strategy Development Support.