Amy has a master's degree in secondary education and has taught math at a public charter high school.
What Is Demand?
In this lesson, we will talk about demand and how to manage it. We define demand as the amount of product or service that a group of customers are willing to purchase at a given price. For example, a successful burger joint might be selling 500 burgers a day. If that is what they average per day, then 500 burgers a day is their current demand from their customers. They have set the price so that their customers are willing to purchase 500 burgers a day. The burger joint is successful when they are able to meet this demand every day. Nobody walks away empty-handed and hungry.
When Demand Increases
But what happens when suddenly a really famous person visits the burger joint, and this famous person starts to talk about this burger joint? All of a sudden, this burger joint finds that its demand has suddenly increased to 800 burgers a day. The burger joint didn't expect this at all. Now they find that at the end of the day, all of their ingredients are gone, and they have to let hungry customers walk away empty-handed.
Why is this? It's because they were purchasing ingredients to meet their demand of 500 burgers a day. If they purchased ingredients for more, it would have gone to waste. But now, since the demand has jumped because of the famous person, the burger joint now runs out of burgers before the day is over. What can they do?
The burger joint can certainly go out and buy more ingredients to make more burgers, but with their current staff, they can only make so many burgers. If they bought all those ingredients, they still wouldn't have time to make all those extra burgers. So what else can they do?
One alternative is to outsource some of their orders. To outsource means to get the products from a supplier. Perhaps they can find another restaurant to team up with that can help them meet their demand. Or, perhaps they can find a company that specializes in outsourced food orders.
Perhaps they can outsource some of the production process of their burgers to another company so that they receive burgers that are mostly done and just require the finishing touches before serving. This way, they won't have to worry about purchasing extra ingredients or worry about having the time to make all those extra burgers. Now they can focus on meeting the demand and serving enough of the burgers that the famous person liked. This way, all the customers that come in will walk away full, happy, and satisfied with the now-famous burger.
Outsourcing does sound like it could work, but the area that the burger joint is in has limited parking. The day that they had 800 orders created a huge traffic jam on the street. People stopped and refused to move until they saw a free parking spot. Yes, people were stopping traffic just so they could try the burgers.
To avoid this from happening, another alternative that the burger joint can try is that of increasing the cost of their burgers. Right now, the price of a burger is $4.50. With fries and a drink, it is $6.00. If they increased the price of a burger to $6.00 and the combo meal with fries and a drink to $9.00, this would naturally lower the demand from 800 down to a more manageable amount that the burger joint can handle. Increasing the price would also prevent the traffic congestion that an increased number of customers would cause. Increasing prices does somewhat limit your demand. By increasing your prices, you can decrease demand, and by decreasing your prices, you can increase demand.
Each of these alternatives produces a higher profit for the burger joint due to the increased demand. When demand increases, so do profits. How this increase in demand is handled is determined by what you are willing to do. Are you willing to handle more customers at your business? Or, are you willing to somewhat limit your customers by increasing your prices? These are questions that you have to answer to make a final decision for your business.
Let's review what you've learned. What did we talk about in this lesson? We talked about ways to manage demand. We define demand as the amount of product or service that a group of customers are willing to purchase at a given price.
The two alternatives that we discussed are outsourcing and increasing prices. To outsource means to get the products from a supplier. When you outsource, you are letting someone else do the work for you in making your product or providing your service. This way, you can sell more of what you provide without having to put in the extra work that you don't have time for. Increasing prices lowers your demand when the demand is higher than what you can provide. Alternately, if you want to increase demand, you can lower your prices.
Test Your Recollection
|Demand||the amount of product or service that a group of customers are willing to purchase at a given price|
|Demand increases||i.e. good advertising, word of mouth, sales rise|
|Outsource||to get the products from a supplier|
|Alternative||i.e. menu changes, price increases|
Upon completion of the lesson, you might follow a checklist that includes:
- Define demand and provide an example
- Indicate why demand may increase and present possible solutions
- Discuss the implications of increasing prices
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