SUPPLY AND DEMAND 1
Economic Sustainability Measures in Supply and Demand
Davina Edwards
Department of Business, Liberty University
Author Note
Davina Edwards
I have no known conflict of interest to disclose. Data gathered for this paper has been derived
from personal workplace experience and peer-reviewed articles. Correspondence concerning this
article should be addressed to Davina Edwards
Email: dedwards158@liberty.edu
SUPPLY AND DEMAND 2
Economic Sustainability Measures in Supply and Demand
Supply and demand is the basic function of the supply chain and vital for business
profitability. Businesses rely on the symbiotic relationship they have with supply chains to meet
customer demand. The never-ending cycle to meet the needs and wants of customers across the
globe has become a necessity in the digital age. Customers rely on this basic function for raw
materials, food, and manufactured products just to name a few.
With the rise in demand for goods and services, the supply chains across the globe are
working diligently to try and keep up amidst disruptions. These disruptions can create careless
behaviors that could have detrimental effects on the environment and the economy. “Economic
sustainability means that economic systems support sustainable social and environmental
outcomes” (Jeronen, 2020, para. 2).
According to the textbook, there is a five forces framework which suggests that five
interrelated forces affect the level, growth, and sustainability of industry profits (Baye & Prince,
2022, p. 222). The five forces are entry, power of input suppliers, power of buyers, industry
rivalry, and substitutes and complements. The goal of economic sustainability is to ensure the
company’s long-term economic development is met while also managing the environmental,
social, and cultural sustainability. To understand the economic sustainability measures in supply
and demand, however, we must first break down each aspect of this basic function.
Supply and Demand
As stated previously, supply and demand are the foundations in which businesses operate.
Without supply and demand, a business could not operate. Consumers create the demand, or
need, for products and services while the manufacturers work to make the supply to meet the
demands of the consumers. You cannot have one without the other since there would be no
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reason for businesses to produce supply if there is not a demand for said supply. What happens to
one affects the other and generally determines the overall costs to consumers.
Supply
Supply is the term used for goods and services that are available for customers to
purchase. As with anything else, there can be shifts in supply that depend on several factors. For
example, Covid created a shift which caused a crisis within the supply chain. When the demands
of the customers increased, so did the need for supply. However, with shutdowns plaguing most
companies, supply was depleted at a rapid rate. This led to a supply shock with an even larger
demand shock within the industry (Maiello, 2020, para. 2).
Variables that affect the supply curve are called supply shifters which includes the prices
of inputs, level of technology, number of firms in the market, taxes, and producer expectations
(Baye & Prince, 2022, p. 50). When one shifts, it shifts the entire supply curve. One supply
shifter mentioned in the textbook is a bill passed by Congress that would require employers to
provide health insurance to their employees. In retailers that rely on low wage workers, must
increase prices to offset the costs of providing insurance to all employees (p. 64).
Changes in supply shifters can also have an affect on the price and quantity of these
goods and services companies provide to their customers (p. 64). Events, like Covid-19, also
play a critical role in shifts in supply. A natural disaster can create an increase in demand for
supply which can deplete supplies rather quickly because most people start to panic buy. The
toilet paper crisis of ‘2020’ was just one small example of this as well as the empty grocery store
shelves across the globe. Manufacturers adopted new strategies to increase production efficiency,
so priority shifted to higher-volume items to maximize output (Banker, 2021, para. 11).
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Going back to Covid-19 as a factor in disrupted supply, this has created the current
inflation that is happening in our country and across the globe. The current inflation has been one
of the fastest increases in history which are up 6.2% from the year before (Austin, 2021, para. 1).
We are well into ‘2023’ and we’re still witnessing shortages in both supply and labor which
could lead to inflation being permanent (para. 5). Inflation is due to supply being down because
of limited supply, shortage of workers, and a shortage of drivers. When everything shut down, so
did the supply chains. However, most consumers opted to go online to order what they needed
and wanted. Since no one was working to continuously ensure supply stores were full, the supply
was eventually depleted.
Demand
Demand comes from the consumer’s desire for a product or service and the willingness to
pay the asking price for the product or service. According to Indeed.com, the American
worldwide employment website, there are seven different types of demand. The first type of
demand is joint demand which are products that are normally purchased in sync with other
products like milk and cereal or peanut butter and jelly (Indeed Editorial Team, 2022, para. 6).
The second type of demand is composite demand which are products that have multiple uses.
Corn is used as both food, animal feed, and ethanol. The rise in demand for one or the other can
lead to massive shortages in supply for others (para. 7). When a rightward shift happens in the
demand curve, that is when there is an increase in demand and there are several variables that
influence the price of the demand which are called demand shifters (Baye & Prince, 2022, p. 43).
Some other examples of this type of demand are the relationships between U.S.
beekeepers and commercially grown crops. There has been a decline in the population of
honeybees which causes problems with both commercial honey and commercial almond
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orchards (Lee et al., 2019, p. 1). The problem arose when the demand for pollination services
increased along with the expansion of almond orchards, but saw the bee population decline due
to massive losses of bee colonies (p. 1). However, the need for pollination services kept rising.
This caused a rise in price for both honey and almonds and anything else that used pollination
services.
Other types of demand, like price demand, relate mostly to how much a consumer is
willing to pay for a product or service. This allows businesses to use this information when
introducing a new product or service to the market. Most consumers will purchase goods and
services based on their own acuity of the good or service’s value. Price elasticity refers to how
the demand will change with fluctuations in price (para. 8).
Just like price is affected by supply, it is also affected by demand. When demand
increases, so does the price of the good or service being demanded. The opposite happens when
demand declines, the price falls as well (Staff, 2020, para. 4). However, when essential items are
in demand and those prices rise to unfair levels, this is considered price gouging. This happened
with the EpiPen which is an essential tool used to save the life of a person having a severe
allergic reaction (para. 7). Without it, that person could die. Unfortunately, price gouging tends to
happen during natural disasters when there is a surge in demand (para. 8).
Competition is another aspect of business that drives demand and how it will be
perceived by consumers. An increase in demand may create new firms that enter the market
which could drive demand even more. Industry structure tends to adjust to permanent demand
increases with either larger firms, or more firms. However, this should depend on the product
space like the increases that occur since this affects the intensity of competition and the
attractiveness of new entrants (Campbell & Hubbard, 2022, p. 2). Competition and the increase
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in demand can also affect the price of the goods and services that are in high demand. This also
affects the price of the goods and services that are in high demand, causing an increase in the
price.
Economic Sustainability
Economic sustainability is the practice created for the long-term development of a
company or nation while also maintaining the environmental, social, and cultural aspects of
activities. It’s basically balancing economic growth while generating profits that could place an
impact on the environment and people (Insight, n.d., para. 1). Economic sustainability goes hand
in hand with social and environmental sustainability. With the rising concerns of global warming,
it’s vital for businesses to look for more sustainable ways to manage their inputs and outputs
without causing more strain on the environment.
Michael Porter founded the “five forces” framework which organizes many complex
managerial economics issues into five categories (Baye & Prince, 2022, p. 222). These categories
are designed to aid a business into being sustainable for the long-run which is the foundations of
economic sustainability.
Entry
The entry of firms into new markets drives competition and demand. Economic factors,
however, play a role in an entrant’s ability to wear away existing industry profits (p. 8). Entrants
are also less likely to gain market share in a quick enough manner to justify the costs associated
with entering into a market. There are sunk costs, economies of scale, and network effects as
well as vetted entrants in a market taking aggressive actions toward new entrants (p.8). It is up to
the entrants to understand the market they are attempting to enter and decide if the costs and
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hassle is worth it. It is also up to the entrant to know if they will have the ability to be able to turn
a profit quick enough to remain in that market.
Power of Input Suppliers
Suppliers have the ability to control and influence the price of their products. This power
is influenced by several factors including the supplier knowing the business purchasing their
goods doesn’t have another option to choose from. This allows the supplier to charge what they
wish and if the business doesn’t want to pay that price, then they have no other options if they
want to continue producing goods. Firms that have the option to choose from many firms
generally receive a better price because the supplier’s bargaining power has been reduced (CFI
Team, 2019, para. 3).
Power of Buyers
Buyer power is similar to that of supplier power. If buyers have the power to negotiate
favorable terms for products and services in the industry, then profits tend to be lower (Baye &
Prince, 2022, p. 8). Some government regulations may impact a buyer’s ability to negotiate these
favorable terms. A buyer’s ability to negotiate may also be affected by the price of substitutions
from other industries in the market.
Industry Rivalry
The sustainability of profits for industries depends on the nature and intensity of rivalry
amongst firms (p. 8). Rivalry is just basic competitiveness which drives companies, and people,
to think of more innovative ways to ‘out do’ their rivals. Some products have been created and
introduced into the marketplace due to rivalry with other companies in the same industry. A good
example would be android vs. iPhone, both always seem to come up with new devices in the
industry to try and outdo each other.
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Substitutes and Compliments
Sustainability of profits also depends on price and value of products and services.
Substitutes tends to diminish profitability in the industry since these substitutes, usually offered
at a lower price, takes the place of other products that may be better quality and cost more. An
example of this may be a store brand product like Equate which is a Walmart brand taking the
place of Tylenol. Tylenol costs more than the Equate brand, so cost-conscious consumers may
opt for the cheaper brand.
Economic Sustainability Measures Taken in Supply and Demand
There are several measures that can be taken in supply and demand for the supply chain
and other business to be more sustainable economically, environmentally, and socially. Some
things the supply chain can focus on is reducing waste when it comes to the products they supply
to other businesses. Renewable energy may be an option to use when considering ways to be
more sustainable. A good example of using renewable energy is PepsiCo which announced in
‘2020’ their plan to use 100% renewable energy by ‘2030’ and they are off to a good start
(Pickerel, 2020, para. 1). PepsiCo has installed solar panels across their employee parking lots
which not only creates a renewable source of energy, but also protects their employee vehicles
from damage that could be sustained during bouts of bad weather. This energy is used to power
their electric semi-trucks. This is just one idea other suppliers can use when working toward
sustainability. (PepsiCo, n.d., para. 3).
Other options include recycling and pollution reduction in plants across the globe. Like
PepsiCo, other manufacturers and suppliers are looking toward more sustainable sources to both
save money and the planet.
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Conclusion
To be more sustainable with supply and demand, companies should increase their
knowledge of sustainable measures. Being economically sustainable means to be able to grow
profit in the long-term without affecting the environment. This means companies should research
topics like renewable energy and how they can recycle waste while lessening their carbon
footprint. Despite the competition and rivalry that comes from competing markets, everyone
should work together to implement sustainable measures for the future of supply and demand.
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