Demand-Supply curve and Willingness to Pay(WTP)


What is Demand-Supply curve?

This is the chart to illustrate how the price is agreed by buyers and sellers where the both side quantity are the key factor.If the demand volume is bigger than supply’s one, the agreed price goes up because goods runs short.If the supply volume becomes biggger , the price goes down.
As you can see in the right graph, the price goes down in either case bigger supply volume at the beggining or putting more supply when equiburium.

What is Willingess to Pay(WTP)?

WTP is the price customers are happy to pay for that goods.Goods may be service,quality,store location or specific period like X’mas etc.. This is different ,consumer by consumer, or even for the same person depending on her/his situation.
Once we can figure out the WTP appropriately to set the price,we will be able to convert the profit formula as below.

Profit = price – cost ⇒ Profit = WTP – cost

The old formula indicates the only way to miximize the profit with “how to cut the cost?” Now, you will have another approach to think “how to maximize WTP”.
Eventually, you can shift to non-price competition from price-cutting with lessing profit.
We believe there are lot’s of discussion have been made from the view of “how to cut the cost” just because farmers are price takers who have to accept the allocated price from the traded price in market.
Now , we argue how imprtant it is to discuss “how to assess WTP to set prices by farmers” to run their business stably and profitably.

Differentiation starategy with WTP

Once you understand what the value of your product is and where people’s WTP is, you can start differentiation strategy from others.
Here is the example to illustrate how this strategy works to make more profit.
There are 100 people in the market who have interest in your goods, however their WTP are different from JPY 3,000 to JPY 10,000.
If you sell one type product at JPY 4,000,your sales revenue will be JPy 560,000.
Once you categorize 100customers into two client categories,one is happy to pay JPY 8,000 and another is fine to buy up to 4,000, you can increase sales revenue to JPY 680,000 to supply two differentiated goods with different price.

Supply-Demand curve and WTP

As we illustraed in the Supply-Demand curve chart, there is not WTP in it.Then we anyhow add WTP in that chart where we can split both demand and supply curve into two, one is for high-quality oriented customers and another for price-sensitive ones.
You can succeed differentiaion strategy to supply different value goods with different price to meet the expectation of each.
To be more specific,
If you can make total sales revenue ( p1 × q1 ) + ( p2 × q2 ) biggra than ( p0 × q0 ), you win!

Original Index

Leave a Response