The Relation Between Supply, Inventory, and Demand

Whether you own a small or big business or simply want to learn more about supply and demand, it is important to understand the relationship between supply, demand, and inventory. These three are important aspects of any business, and managing them well can help you have a successful business. 

What are Supply and Demand?

what are supply and demand.
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Supply and demand are important aspects of economic activity. The supply consists of the total amount of a product or service available at a given time to consumers at a given price. Demand represents a customer’s desire to purchase products and services. Additionally, it is used to measure how willing customers are to purchase a product or service at a given price. 

What is Inventory?

Inventory consists of anything that your business uses to sell or produce products. It can be finished products, parts, or any raw material. Inventory is often managed through a system that tells you what you have in stock, how much of it, and what the demand is. This allows your business to rarely run out of stock of something that might lead to unsatisfactory service. As a business owner, you should strive for tight inventory control since it can affect productivity and profitability. 

There are four types of inventories in a business, which include:

  • Raw Materials: any materials that are used to create a finished product. These inventory items are bits and pieces of parts that are currently in stock but have not yet been used to go into other types of inventory.
    • Work-in-Process: anything that is being used in the process of creating the final product. From a cost perspective, work-in-process inventory includes raw materials that are still in production when the accounting period ends. 
    • Finished Goods: Any product that is ready for customers to buy is a finished good.
  • Overhaul: Also known as MRO (maintenance, repair, and operating supplies) inventory, it focuses on the small details of a business. Overhaul is any inventory that is required to assemble and sell the finished product but is not built into the product itself. Visit to learn more. 

Inventory, Supply, and Demand

the relation between supply, inventory, and demand.
photo credit – pexels

These three important aspects any business owner should pay attention to can give you helpful insight. Supply and demand help determine the prices and quantities of most products and services in the market. The relationship between the two are key factors for economists to identify trends and make strategic product decisions.

When you understand the aspects of supply and demand, your inventory management will come into play. This is because it is of the utmost importance that a business is always appropriately stocked with its products to ensure a good customer experience. As a business owner, supply and demand analysis will help you find the perfect inventory balance. This allows you to avoid the nightmare of overstock, which is when you have too much of a product in stock, and stockout, when you run out of something. Both these situations are bad for your business because they can lead to costly problems.

Originally posted 2022-12-06 06:52:10.

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