Supply and Demand Diagram

About the Supply and Demand Diagram Template

Understanding how to price your products in a way that’s affordable for consumers but also generates you a profit is essential. Using a supply and demand diagram helps you determine what the best price is.

Keep reading to learn more about what a supply and demand diagram is and how you can use our Supply and Demand Template to create your own.

What is a supply and demand diagram?

A supply and demand diagram helps businesses determine the ideal price of a good or service in a competitive market.

It visualizes the relationship between the demand for a product, how many products are available, and the price point at which manufacturers, sellers, and consumers are satisfied.

Let’s say you want to sell apples to a supermarket chain. How do you determine what the price for them should be? When there are plenty of sellers offering tons of apples, the prices will be low. But, if you’re selling a particular variety of rare apples, then supply will be limited, but the demand will be high.

However, high demand doesn’t necessarily mean high prices. If your price is much higher than the current market price, customers will likely move on to a competitor or lose interest in your product.

Given all these factors, how do you determine a fair price? While there are many considerations to take into account, the law of supply and demand and a graph to visualize it helps greatly.

A supply and demand diagram has the following key elements:

Supply curve

Based on the Law of Supply, this curve tracks the number of products a manufacturer can offer sellers during a specific time frame. Often, manufacturers have a set limit on what they can produce in a month.

When there is excess supply, the market is saturated, and demand for your product decreases. The price falls since consumers can find the same product elsewhere — maybe even for cheaper.

In some cases, customers might view cheap products as inferior goods that lack quality and will opt for higher-priced offerings. Some sellers even intentionally limit product supply to raise demand and increase prices.

When there is excess demand and customers are willing to pay a higher price, manufacturers can provide more products to boost profits.

Demand curve

The demand curve is based on the Law of Demand and focuses on the consumers. It represents how many products the average customer is willing to buy at a specific price point.

When the price is low, demand increases as consumers will buy more products. Lower prices often lead to higher demand. But you can’t price your products too low, as it will reduce profits.

When the price increases, demand decreases as consumers look for cheaper alternatives. When both demand and supply are high, you can charge higher prices for your product.

Consumer income dictates their buying decisions. Therefore, if your target buyer cannot afford your product, it won’t sell.

Equilibrium

When you plot your supply and demand curves, they will intersect. This intersection represents the point where supply and demand are equal for a product. It is called a supply and demand equilibrium, or market equilibrium, and it helps determine the equilibrium price. The price of your product should be close to the equilibrium price.

A higher equilibrium price means there's enough supply and demand to charge more for your products.

The equilibrium also helps you understand how many products you should make available to consumers during a specific time period. This is known as equilibrium quantity.

Elasticity

While the supply and demand equilibrium is a good price indicator, there are exceptions. Demand for products can vary when the price level changes. This is known as price elasticity.

Products whose demand and supply change drastically when the price changes are known as elastic products. If prices don’t significantly impact your product’s supply and demand, then it is inelastic.

In the apple example, if the prices rose too high, most people would stop buying them. They are elastic. However, if it was an essential household item, consumers would still buy it but might buy less. These are inelastic products.

The benefits of a supply and demand diagram

Here’s why sellers should use a supply and demand graph for product pricing:

• Understand the real demand for a product. If there is little to no demand, the product might not be worth investing in.

• Understand your supply capabilities. You can match supply with the actual demand for the product. If the demand outpaces supply, you can look into additional manufacturers and ways to procure other resources.

• Set a fair price point for your product. This will help you attract the most consumers.

• Analyze where and how to invest your time, money, and resources.

Using Miro's supply and demand graph maker, you can update your graph to quickly reflect price rises, market supply changes, and demand changes for a particular good. This way, the information your diagram displays is always up to date.

Create your own supply and demand diagram

Miro is the perfect canvas to create a graph and share them. Chart a supply and demand graph with ease by following these steps:

Step 1: Create a spreadsheet document and add data related to supply, demand, and pricing changes. You can use collaborative software like Google Sheets for this.

Step 2: Arrange all your information in chronological order to get a rough outline for your graph.

Step 3: Select Miro’s Supply and Demand Template.

Step 4: Create a graph with the number of units represented by the X-axis (horizontal axis) and different price points on the Y-axis (vertical axis).

Step 5: Use your data to draw a downward-sloping demand curve.

Step 6: Plot your supply curve as needed to match existing resources. It must intersect with the demand curve.

Step 7: Mark the intersection point as the equilibrium price. Draw lines from the different axes to the equilibrium point to understand how much demand is actually there and how many products are needed.

Step 8: Easily customize your graph on Miro to make it easier to understand. Use different types of lines and add colors to avoid any confusion. For example, you can highlight the equilibrium price in a different color.

Step 9: Effortlessly modify the Supply and Demand Template to represent the latest data. For example, you can change the inputs for supply curve shifts to understand how that affects demand curve shifts and price.

Step 10: Share your graph with your team and any stakeholders via a link.

Example of an effective supply and demand diagram

A supply and demand diagram has many use cases, but it is primarily used for pricing products.

So, if you want to determine how much a smartphone should cost, you start by drawing an initial graph with the prices listed on the Y-axis and the number of units on the X-axis.

Next, draw basic supply and demand curves. You can label them S (supply) and D (demand). Determine where they meet, and label it as 'E' to mark the equilibrium point.

Draw lines from the X and Y axis to E. This shows you both the ideal price point and the number of phones needed.  If your current price points or the number of units are below E, then there is a shortage of supply or a surplus.

As months go by, factors can fluctuate. Let’s say that the cost of production decreases, then the supply increases, and the product’s price goes down. To represent this change, you can draw a new supply curve (S1) and mark a new equilibrium point (E1).

You can use this method to determine the new best price for your product.