What happens when Supply can’t meet Demand?

Impact

One of the first lessons of economics is that demand is the quantity of a good or service consumers are willing and able to purchase at a given price.

The definition of supply can seem a little bit more complicated. According to your textbook, supply is the amount of a good or service “that producers are willing to offer for sale at different prices in a given period of time”. This makes sense; if supplying a product meant that a firm was losing money, they would (in a theoretical sense) be both unable and unwilling to supply it. But what about cases where firms are willing to supply but are unable to?

Whilst supply chain disruptions may appear to be only a minor inconvenience, they can have massive, negative economic impacts – hurting consumers, businesses and economies as a whole.

When Supply cannot meet demand, markets stop operating efficiently and firms are given outsized pricing power over consumers. A shortage – in this case caused by a geographic divide between production facilities and consumers – results in firms being able to charge more in the market as consumers have no choice but to pay a higher price if they wish to buy the product in question.

Supply chain disruptions also mean that producers struggle to get to inputs needed to produce finished goods. This means that even firms who can easily supply their goods to consumers have also had to raise prices and waiting times for consumers due to the slow movement of inputs.

Finally, our economies on the whole have seen the neg ative impacts of higher prices, lower supply and longer waiting times. Inflation has been rampant throughout all developed economies in the past year and a half –

Why? Because of failures in global supply chains.

Real Life Examples

In the past three years some of the world’s biggest firms (think Apple, Tesla, Amazon) have been willing but unable to supply goods to their markets.

In the US, car shortages have been especially bad, with stock levels down by 64% since pre-Covid levels caused by semi-conductor shortages due to manufacturing slow-downs in China and Taiwan.

A supply chain is effectively everything between you and the factories and mines where the goods you want come from. Consider an iPhone. IPhone components are largely produced in Mainland China, India and the US, with metals from Mongolia, the Congo, Australia and elsewhere. In all an iPhone could contain parts and raw materials from as many as 43 countries. This allows companies like Apple to keep their production costs low to make as big a profit as possible – and (sometimes) to provide as low a price as possible to consumers.

Apple’s global supply chains work great – so long as everything runs to plan. So long as there isn’t a global event which forces factories to close, shipping to grind to a halt and workers to be confined to their homes.

Current Outlook

Looking forward in to 2023 and beyond, many of the supply chain issues we have faced in the past 2 years appear to be subsiding – freight capacity through ports, especially in China and the US have increased to pre-Covid levels, Covid lockdowns, a major cause for the disruptions, appear to be a thing of the past and ocean freight prices have fallen to pre-Covid levels.

CPI Inflation (a measure of price increases of consumer goods) currently sits at 6.4% annually in the US and 8.8% in the UK.

Lower supply on the whole means that even consumers who have enough money to afford to buy a product aren’t always able to – and are forced either on to second hand markets (this is especially clear in the market for second hand cars, in the UAE prices increased by 20% in 2022) or are left unable to purchase the goods that they want.

Finally, longer waiting times for both consumers and firms have significantly reduced economic efficiency –be it firms’ inability to efficiently use assets such as factories when they lack key inputs to their production or consumers inability to enjoy the benefits of goods they have purchased due to long shipping periods.

Although lagging shortages and long-term inflation appear to be pervasive in our modern economies we appear to have emerged from the past two years with a very important economic lesson – sometimes supply cannot meet demand.

Keywords:

CPI - Consumer Price Index, weighted average price changes of a basket of consumer goods

Supply Chain - production and logistical system for goods and commodities

Further Reading: https://www.imf.org/en/Publications/fandd/issues/2022/06/the-stretch-of-supply-chains-B2B