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| Image via investopedia.com |
OMG this looks super confusing right?
It can be. You can get a PhD in practically this diagram alone.
But it doesn't have to be.
In my macroeconomics class in business school, we spent entire class sessions studying case after case, doing equation after equation, and every single one boiled down to: when demand increases but supply decreases, prices increase. When demand decreases but supply increases prices decrease.
Let me put it in blogging terms for you: You're one person. No one can do what you do. There are 24 hours in the day, 8 of which you spend sleeping, 8 of which you spend eating, exercising, with friends and family, and doing non-work things. That least 8 hours of work. (Let's pretend we're not all workaholics for a minute.)
That means supply = 8 hours of work, and demand = the number of hours/day that clients want to hire you.
Supply Outstrips Demand: Lower Prices
If one company wants 4 hours of your work time every day, and that's the only business you have, that means that there is more supply (working time in your day) than demand (clients that want to hire you for that working time). You don't want to sit around not making money the rest of the day, so you probably need to lower your prices to see if you can attract any more clients to fill the remaining 4 hours in your day.
Supply Equals Demand: Keep Prices The Same
You get another client - woohoo! They have a project that takes up your remaining 4 hours/day. That means your 8 working hours per day are all accounted for. When the amount of time you have available to work perfectly matches the amount of work you have, that means your prices are perfect (this is the point of equilibrium on the graph). Don't change a thing.
Demand Outstrips Supply: Raise Your Prices!
Now let's say you get a third client who needs 2 hours per day of work. So you have 10 hours of work per 8 hour day. Um. What do you do? I'll bet you can figure this out.
So here is the one thing you need to know about supply and demand:
If you have too much work, it is a good indication that the value of your work is higher than the prices you are charging. When demand exceeds supply, raise your prices!
But it doesn't have to be.
In my macroeconomics class in business school, we spent entire class sessions studying case after case, doing equation after equation, and every single one boiled down to: when demand increases but supply decreases, prices increase. When demand decreases but supply increases prices decrease.
Let me put it in blogging terms for you: You're one person. No one can do what you do. There are 24 hours in the day, 8 of which you spend sleeping, 8 of which you spend eating, exercising, with friends and family, and doing non-work things. That least 8 hours of work. (Let's pretend we're not all workaholics for a minute.)
That means supply = 8 hours of work, and demand = the number of hours/day that clients want to hire you.
Supply Outstrips Demand: Lower Prices
If one company wants 4 hours of your work time every day, and that's the only business you have, that means that there is more supply (working time in your day) than demand (clients that want to hire you for that working time). You don't want to sit around not making money the rest of the day, so you probably need to lower your prices to see if you can attract any more clients to fill the remaining 4 hours in your day.
Supply Equals Demand: Keep Prices The Same
You get another client - woohoo! They have a project that takes up your remaining 4 hours/day. That means your 8 working hours per day are all accounted for. When the amount of time you have available to work perfectly matches the amount of work you have, that means your prices are perfect (this is the point of equilibrium on the graph). Don't change a thing.
Demand Outstrips Supply: Raise Your Prices!
Now let's say you get a third client who needs 2 hours per day of work. So you have 10 hours of work per 8 hour day. Um. What do you do? I'll bet you can figure this out.
So here is the one thing you need to know about supply and demand:
If you have too much work, it is a good indication that the value of your work is higher than the prices you are charging. When demand exceeds supply, raise your prices!
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