Does Price always follow demand & supply?

Does Price always follow demand & supply?


When demand of product X increases and supply stays the same – price increases.

When demand of X continues to increase and supply stays the same constantly – price increases to a level where consumers cannot afford to buy the product X.

This is where innovation comes into play. “Necessity is mother of all inventions”

This invention can be an alternative product or just supplements of product X (for discussion purpose we will call alternative product as Y), in both the cases the main motto of this invention is to satisfy the demand and companies see this as an opportunity window to gain profit by selling Y at a cheaper price.

In this situation, both the consumer and producer of product X has to suffer, because the consumer has to forgo the product X due to his monetary inability to buy and the producer of X because he is unable to fully utilize the profitability scale of his product.

Saturation and duplicity are coming too fast for successful products like X because of open market. At times, producers are not able to attain Profit Expected or attain Break Even because of severe global competition.

This situation scares the small scale companies to innovate new products, as there would be lot of replicas produced on a large scale (alternatives) by companies earning profits through economy of scale. It gives only two options for small scale companies i.e. either to scrap their production for avoiding losses incurred by heavy competition or to agree for royalty with bigger organizations and sell their copyrights.

According to me, the only solution to this problem for these organizations to survive is by addressing the low income consumer market and to produce innovative products which would better their lifestyle. By doing this, not only is there an increase in consumer base which would reduce the time scale of the opportunity window created, but also increase in the time to realize break-even and gain profits at the same time.

By addressing low income consumers, producers would price their products low, which would eliminate competition to a certain level. The drawback however would be building brand awareness and to eliminate fakes. But ultimately even for smaller organizations (who cannot achieve economies of scale), if they want to sustain in the market, they have to adapt to CK Prahalad’s Bottom of the Pyramid.

Bottom of the Pyramid concept not only helps the organizations which can earn profits through economy of scale but even the small scale companies. They can adapt this concept, sustain in the market and bring a change to the lower middle class and middle class people.