What are supply and demand side effects?

Supply side and demand side effects refer to how changes in supply and demand affect economic outcomes. Here are key insights from trusted experts:

1. Quality and Perceived Value: Different strategies can lead to supply and demand reactions. For instance, paying higher wages can attract better workers (supply side) and enhance a company's reputation, potentially attracting customers (demand side). However, these effects are interrelated and complex, as companies like Costco may benefit from both better worker quality and use their practices as marketing tools without explicitly planning it 1.

2. Economies of Scale:

   • Demand Side: Also known as network effects, where a product becomes more valuable as more people use it, such as social media platforms or communication tools like WhatsApp.
   • Supply Side: Describes how costs decrease as production scales up, leading to big companies often benefiting the most.
   • These dynamics can combine in various ways, such as traditional one-sided networks or more complex two-sided or multi-sided networks, where different groups benefit from increased participation 2.

3. Stagflation and Financial Frictions: During the 60s and 70s, it was noted that supply side effects—like financial frictions and credit rationing—were more dominant in causing stagflation (simultaneous high inflation and unemployment) compared to demand side effects such as the Fed's inability to control demand 3.

   
   1
   The Voluntary Minimum Wage
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   2
   The Future of Networks
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   3
   Supply Side Dynamics
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   4
   Housing Market Dynamics
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   5
   Understanding Inflation
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4. Housing Market: Higher interest rates can reduce demand for housing by making mortgages more expensive, which cools homebuilder activity. However, the effects on the supply side are much slower, often leaving an imbalance in housing markets 4.

5. Inflation: Persistent inflation primarily results from a greater increase in money supply relative to goods available (demand side). In the short term, supply shocks (like oil crises) can also inflate prices but are usually temporary. Over time, demand-driven factors usually dominate 5.

These examples illustrate the multifaceted influence of supply and demand side effects across different sectors and economic conditions.