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Supply and demand is perhaps one of the most fundamental concepts of economics and it is the backbone of a market economy.
Demand refers to how much (quantity) of a product or service is desired by buyers. The quantity demanded is the amount of a product people are willing to buy at a certain price; the relationship between price and quantity demanded is known as the demand relationship.
Supply represents how much the market can offer. The quantity supplied refers to the amount of a certain good producers are willing to supply when receiving a certain price. The correlation between price and how much goods or services are supplied to the market is known as the supply relationship. Price, therefore, is a reflection of supply and demand.
In our case study (the market of “green” goods and services - referred to here as MGGS), we have to deal with important distinctive features:
The law of demand states that, if all other factors remain equal, the higher the price of a product, the less people will demand that product or good. Therefore, the higher the price, the lower the quantity demanded. The amount of goods that consumers purchase at a higher price is less because as the price of goods increase, so does the opportunity cost of buying that product. As a result, people will naturally avoid buying a product that will force them to forgo the consumption of a familiar product they value more. Herein lays the major difficulty and the double-bind that curbs the MGGS: The quantity of “green” products and services exchanged is not large enough to make prices decrease. At the same time, the offer on “green” products and services is neither structured nor “visible” enough for the customers to increase their demand on such products significantly.
2003 Investopedia.comUsed only with express written permission
Chart showing that the curve is a downward slope.
Therefore, all the factors remaining equal, we can postulate that a better structured and more visible offer will make more customers purchase additional “green” products and services therefore lowering their price, which will in return increase the quantity exchanged on the MGGS.
A, B and C are points on the demand curve. Each point on the curve reflects a direct correlation between quantities of “green” products and services demanded (Q) and price (P). So, at point A, the quantity demanded will be Q1 and the price will be P1, and so on. The demand relationship curve illustrates the negative relationship between price and quantity demanded. The higher the price of “green” products and services, the lower the quantity demanded (A), and the lower their price, the more “green” product and services will be in demand (C).
However, the movement implies that the demand relationship remains consistent. Therefore, a movement along the demand curve will occur when the price of the “green” products and services changes and the quantity demanded changes in accordance to the original demand relationship. In other words, a movement occurs when a change in the quantity demanded is caused only by a change in price, and vice versa.
2003 Investopedia.comUsed only with express written permission
Chart showing movement along the demand curve.
Therefore the point becomes to actually create that change by “assisting” the consumers modify their demand of “green” goods and services.
Now that we know the laws of supply and demand, let's turn to an example to show how supply and demand affects the price of “green” products and services.
Imagine that a special edition of a “green” mattress is released for $200. Because the mattress company's previous analysis showed that consumers will not demand mattresses at a price higher than $200, only fifty “green” mattresses were produced because the opportunity cost is too high for suppliers to produce more.
If, however, the fifty “green” mattresses are demanded by 70 people, the price will subsequently rise because, according to the demand relationship, as demand increases, so does the price. Consequently, the rise in price should prompt more “green” mattresses to be supplied as the supply relationship shows that the higher the price, the higher the quantity supplied.
That is the current situation of the market of “green” goods and services. It becomes all the more complicated when the mattress company discovers the difficulties in reaching a large number of customers because “green” mattresses is a marginal product and there is no specific way for a large number of consumers to know that a particular type of mattress is now available, unless they are actually in search of one specifically (typically through internet research). As a result, the basic consumer will buy a standard mattress. This is where the market of “green” products and services stands at present.
If, however, there are 70 “green” mattresses produced and demand is still at 50, the price will not be pushed up because the supply more than accommodates demand. In fact after the 50 consumers have been satisfied with their “green” mattress purchases, the price of the leftover mattresses may drop as the producers attempt to sell the remaining twenty “green” mattresses. The lower price will then make the “green” mattresses more available to people who had previously decided that the opportunity cost of buying the “green” mattresses at $200 was too high. That’s where we want to get. To make the quantity of green products and services exchanged increase in the lowering prices process. But this process has no chance of happening as long as a larger number of consumers are not reached.
2003 Investopedia.com Used only with express written permission
Chart showing equilibrium point.
Consequently, there should be a place, a tool or a way for the consumers to obtain the information available and organized as to how to source the “green” products or services they are looking for at the best price possible; what’s at stake here is for the market of “green” products and services to become more visible.
When supply and demand are equal (i.e. when the supply function and demand function intersect), the economy is said to be at equilibrium. At this point, the allocation of goods is at its most efficient because the amount of goods being supplied is exactly the same as the amount of goods being demanded. Thus, everyone (individuals, businesses, or countries) is satisfied with the current economic condition. At the given price, suppliers are selling all the goods that they have produced and consumers are receiving all the goods that they are demanding.
As you can see on the chart, equilibrium occurs at the intersection of the demand and supply curve, which indicates no allocative inefficiency. At this point, the price of the goods will be P* and the quantity will be Q*. These figures are referred to as equilibrium price and quantity. In the real market place equilibrium can only ever be reached in theory, so the prices of goods and services are constantly changing in relation to fluctuations in demand and supply.
Nevertheless, by working on the demand and on the supply, the goal here is to make the market of green products and services more efficient and closer to equilibrium than it is today (only a small quantity of goods and services exchanged and prices too high).
Before starting this case study, it’s important to note that there are no clear figures as to establish which percentage of the population actually buys “green” products (studies show a clear discrepancy between what potential customers say they would do when interviewed and the purchases they actually make). If we return to our example of a “green” mattress, what happens?
For this index to work and be effective in regards to making the Market of “Green” Goods and Services (MGGS) become more efficient, there is a need for an organization that would collate the data and information worldwide (nest, collect, analyze, test and structure) as the greater the market, the more efficient it will be. An independent and neutral non-profit organization in the sustainable development sector that would work closely with universities and chambers of commerce and trade internationally seems the logical solution. Government funding, chambers of commerce/trade and the private sector would be required. Gaea21 appears to be a superior solution.
The development of the gaea21 green index would start with companies that offer “green” products and services in a given area and then would expand in the proximity, growing with time and developing according to the principles developed above. The second logical phase would include the assessment and evaluation of all existing companies via a “green audit” of their standards and procedures based on enhanced versions of the ISO 14000 and 14001 (which is all but a reference framework but doesn’t guarantee – far from it – that a given company is “green” or has an effective social responsible conduct).
High standard quality of products and services
The gaea21 service would also include a green business network and provide any given selection at the request of providers or distributors for services or products respectful of the requirements of sustainable development.
A logical first step would be to gather as many already existing “green” stakeholders and networks as possible (research, companies, services…) to be able to give the most complete overview. It would be then necessary to have them detail their criteria and qualifications and complete a template that would reflect most of their ethical, social and/or environmental status.
Eventually, green stakeholders will also be classified and rated on the basis of a control on their sustainability performance, conducted by their peers using the tools proposed by gaea21 and/or under its auspices. This control would result, when appropriate, to the labeling of the actors involved.
This labeling, independent, transparent and objective in its method (based on due diligence plus polls and surveys over consumers and peers), would enable both customers (Demand) and green stakeholders (Supply) to directly identify the products, companies, organizations or individuals who meet the requirements of sustainability, are environmental, social, ethical and permit economic viability.
Yvan Claude is president of gaea21, a non-profit.
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