Understanding how supply and demand impact the price of goods can help you save money
It is well known that the "laws" of supply and demand play an essential role in the economy and directly impact the price of goods and services across all industries.
Out-of-season fruit costs more than season fruit, and jobs that require particularly hard-to-find skills tend to be high-paying ones.
Of course, the "real" global economy is very complex, and many other factors come into play. Still, fundamentally, supply and demand will always be at the core of the situation.
Impacts of supply and demand
Most businesses are well aware of that dynamic and do their best to take advantage of them, mainly because most consumers, on the other hand, are oblivious to it. That's why understanding the role of supply and demand in the economy is not only for business owners. Everyone can benefit from that in some cases.
In some cases, you just can't escape that reality. Suppose there is a shortage of something such as energy or food, for example. In that case, the prices of those things will skyrocket, and you will probably be forced to pay it regardless because those are things you need right now, and you really can't afford to wait until the supply is normalized.
Another aggravating factor is that forecasting supply and demand is not exactly easy in many cases. Sure, there is a lot of science behind it, and we are getting better and better at it, but a complex system such as the world economy is surrounded by uncertainty which can easily wreck our best production models or demand predictions.
In some cases, however, demand fluctuates according to a well-established cycle that can easily be anticipated, and if you plan well enough, you can use that to your advantage. I'll try to illustrate that with a real situation I'm going through right now.
Playing around the curve
I recently moved to a new apartment, and while I'm very happy here, I discovered the hard way that this thing can get cold in the winter. I live in Brazil, and our winters here are not really severe, but we get a couple of weeks every week where it gets cold enough to cause considerable discomfort. Add to that that our houses aren't built for cold weather because we only have low temperatures for a very short period every year.
People commonly handle that situation by buying an oil heater, which is exactly what I decided to do.
However, because I'm well aware of the supply and demand dynamics that we have been discussing so far, I decided to check the price history of oil heaters before pulling the trigger and what I found is very interesting, although hardly surprising:
This chart shows an oil heater's price history (in BRL) for the last 6 months. As you can see, the price spiked from around BRL 380 to BRL 660 in 2 months.
Now, let's take a look at this other chart:
This chart shows the yearly average temperature trend where I live.
As you can see, the average temperature hits its lowest point around July, which, if you go back to the previous chart, is precisely when the heater's price begins to spike. This is obviously not a coincidence, and those two variables are clearly correlated.
It's straightforward to establish this correlation: as it gets colder, more people look for heaters to keep their houses warm, driving demand for that particular good which, consequently, results in a price increase. That is actually very obvious when you think about it, and still, this cycle repeats year after year.
As I said, the winter here is not very extreme, and my life is not threatened by it, so, knowing how the prices change over the year, I decided to endure this mild annoyance and wait for the summer, when the prices of heaters will be at their lowest, due to the lack of demand. Then I will buy a heater for a more comfortable winter next year.
Final thoughts
I already knew about this heater price dynamics, but I thought it would be interesting to use this example to demonstrate a real-life application of the laws of supply and demands and how understanding how it works can, sometimes, help you save money.
I strongly suggest you expand this exercise to every aspect of your life. Again, sometimes you won't be able to escape the reality of the market, but there will be some situations where you can get a good deal by playing around the curve.