Togzhan Yerzhankyzy | 14.10.2025
How Supply and Demand Influence Pricing Strategy in Business?
In a competitive market, pricing is more than just a way to cover costs; it's a strategic tool. When demand is high and supply is limited, companies can raise prices; when demand falls and supply rises, prices often fall. Thus, supply and demand play a decisive role in the market.
They shape every pricing decision, production choice, and marketing move. Whether a company sells electric cars, smartphones, or airline tickets, these forces determine how much consumers are willing to pay and how companies set their prices.
When Demand Falls, Prices Adjust
In recent years, many global industries have faced declining demand as consumer buying has declined under pressure from inflation, changes in interests and changing market preferences. After the post-pandemic boom, many businesses in Europe, North America and parts of Asia have begun cutting back on major purchases such as cars, electronics and luxury goods. Tesla is one of the clearest examples of how falling demand is forcing companies to reconsider their pricing strategies. In 2024, Tesla had its first annual decline in global deliveries in nine years, down 1.1% to 1.79 million vehicles. The factors that contributed to this slowdown are: rising competition, reduced subsidies, higher interest rates, and market saturation. To address this issue, Tesla decided to lower prices in its core markets. The company introduced new standard versions of the Model 3 and Model Y, priced in Europe at approximately €40,000. These versions featured fewer features and a shorter range, allowing Tesla to attract more budget-conscious buyers without significantly redesigning the vehicles. Thus, Tesla demonstrated that when demand declines, even the most innovative companies are forced to adapt or risk losing their market position.
Elastic vs. Inelastic Demand
Price elasticity of demand measures a product's demand sensitivity to price changes. A small price increase leads to a significant drop in sales, and that means demand for a product is elastic. If customers continue to buy despite the price increase, demand is inelastic. For example, demand for airline tickets is elastic. When fuel prices increase and airlines raise farestravellersrs often buy tickets from cheaper airlines or postpone their trips. As a result, airlines are actively using dynamic pricing, adjusting fares in real time based on demand, timing, and competition.
In contrast, luxury brands have inelastic demand. Buyers value brand authority , design, and exclusivity more than price. Even if Apple raises the price of its new model, many buyers will still upgrade to the more expensive one, considering it a premium and irreplaceable product. This allows Apple to sustain strong profit margins even in saturated markets.
Differentiation and Brand Power
Apple's marketing and pricing strategies demonstrate how the company can generate demand through differentiation. Rather than engaging in a never-ending price race, Apple focuses on differentiation, turning technology into a way of life.
From the minimalistic design of the iPhone to the tight integration between the iMac, AirPods, and Apple Watch, the company has built its own ecosystem that keeps users loyal to the brand. Apple customers are less price-sensitive because the company successfully creates inelastic demand. They perceive additional value through seamless device integration, long-term software support, and premium design. That's why, even during global inflation in 2024–2025, Apple increased its revenue by 2.8%, while many competitors struggled with declining sales. Its success lies not in cutting prices, but in convincing consumers that the Apple experience, design, and signature style are worth every extra dollar.
Big companies like Tesla and Apple have proven that pricing strategies are not just about giving the price to the product; they aim to understand how consumers value what you offer and how that value changes as prices change. In Apple's case,when the demand is inelastic, companies can sell products at high prices without worrying about a decrease in sales. Companies can achieve this by using differentiation methods.
Supply also plays an important role in pricing. Limited production capacity or high production costs can restrict supply,increasing the price , while oversupply can force companies to use competitive pricing or promotion strategies.
In conclusion, pricing is not just a reflection of market forces but a tool for their formation. Companies that understand customer psychology and elasticity can control demand and than just react to it.
They shape every pricing decision, production choice, and marketing move. Whether a company sells electric cars, smartphones, or airline tickets, these forces determine how much consumers are willing to pay and how companies set their prices.
When Demand Falls, Prices Adjust
In recent years, many global industries have faced declining demand as consumer buying has declined under pressure from inflation, changes in interests and changing market preferences. After the post-pandemic boom, many businesses in Europe, North America and parts of Asia have begun cutting back on major purchases such as cars, electronics and luxury goods. Tesla is one of the clearest examples of how falling demand is forcing companies to reconsider their pricing strategies. In 2024, Tesla had its first annual decline in global deliveries in nine years, down 1.1% to 1.79 million vehicles. The factors that contributed to this slowdown are: rising competition, reduced subsidies, higher interest rates, and market saturation. To address this issue, Tesla decided to lower prices in its core markets. The company introduced new standard versions of the Model 3 and Model Y, priced in Europe at approximately €40,000. These versions featured fewer features and a shorter range, allowing Tesla to attract more budget-conscious buyers without significantly redesigning the vehicles. Thus, Tesla demonstrated that when demand declines, even the most innovative companies are forced to adapt or risk losing their market position.
Elastic vs. Inelastic Demand
Price elasticity of demand measures a product's demand sensitivity to price changes. A small price increase leads to a significant drop in sales, and that means demand for a product is elastic. If customers continue to buy despite the price increase, demand is inelastic. For example, demand for airline tickets is elastic. When fuel prices increase and airlines raise farestravellersrs often buy tickets from cheaper airlines or postpone their trips. As a result, airlines are actively using dynamic pricing, adjusting fares in real time based on demand, timing, and competition.
In contrast, luxury brands have inelastic demand. Buyers value brand authority , design, and exclusivity more than price. Even if Apple raises the price of its new model, many buyers will still upgrade to the more expensive one, considering it a premium and irreplaceable product. This allows Apple to sustain strong profit margins even in saturated markets.
Differentiation and Brand Power
Apple's marketing and pricing strategies demonstrate how the company can generate demand through differentiation. Rather than engaging in a never-ending price race, Apple focuses on differentiation, turning technology into a way of life.
From the minimalistic design of the iPhone to the tight integration between the iMac, AirPods, and Apple Watch, the company has built its own ecosystem that keeps users loyal to the brand. Apple customers are less price-sensitive because the company successfully creates inelastic demand. They perceive additional value through seamless device integration, long-term software support, and premium design. That's why, even during global inflation in 2024–2025, Apple increased its revenue by 2.8%, while many competitors struggled with declining sales. Its success lies not in cutting prices, but in convincing consumers that the Apple experience, design, and signature style are worth every extra dollar.
Big companies like Tesla and Apple have proven that pricing strategies are not just about giving the price to the product; they aim to understand how consumers value what you offer and how that value changes as prices change. In Apple's case,when the demand is inelastic, companies can sell products at high prices without worrying about a decrease in sales. Companies can achieve this by using differentiation methods.
Supply also plays an important role in pricing. Limited production capacity or high production costs can restrict supply,increasing the price , while oversupply can force companies to use competitive pricing or promotion strategies.
In conclusion, pricing is not just a reflection of market forces but a tool for their formation. Companies that understand customer psychology and elasticity can control demand and than just react to it.
