There are two different, interdependent systems in product innovation: supply and demand. Some believe the supply creates the demand, but at The Re-Wired Group, we think differently.
There are two different, interdependent systems in product innovation: supply and demand. Some believe the supply creates the demand, but at The Re-Wired Group, we think differently.
Economics is a complex field with various schools of thought on how an economy should operate. Two of the main views are supply-side economics and demand-side economics. These approaches have fundamentally different perspectives on how to drive economic growth.
In this article we’ll explore the key differences between supply-side and demand-side economics and the main arguments on each side. Understanding these contrasting views can help make sense of many economic policy debates.
What is Supply-Side Economics?
Supply-side economics focuses on how the supply of goods and services can be increased in an economy, The key premise is that growth can be achieved by lowering barriers for people to produce goods and offer services
The main supply-side policies involve:
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Reducing taxes – This gives people and businesses more incentive to work, invest and take risks. Lower income and capital gains taxes are particularly emphasized.
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Deregulation – Removing government regulations makes it easier for businesses to enter markets and expand. Less red tape allows the supply side to be more productive.
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Free trade – Opening up trade increases access to global markets and production possibilities. Specialization and economies of scale can further boost supply.
Supply-siders argue these policies will inherently lead to more economic output and improvements in productivity. The increased supply of goods and services will also keep prices low for consumers.
Essentially, supply-side economics focuses on expanding the “economic pie” by improving capacity and efficiency. Advocates believe this is the best approach for long-run growth and widespread prosperity.
What is Demand-Side Economics?
Demand-side economics has a different perspective, focusing on how consumer demand can be increased. The logic is that when people demand more goods and services, businesses will increase supply to meet this demand.
The main demand-side policies involve:
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Government spending – Higher government expenditure directly injects more spending into the economy. Things like infrastructure, social services, and direct payments to people will increase demand.
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Monetary policy – By lowering interest rates and increasing the money supply, central banks aim to lower borrowing costs and make loans more accessible. This allows consumers and businesses to spend more.
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Consumer incentives – Policies like tax rebates, subsidies, and minimum wage laws put more money directly into people’s pockets. This gives them greater ability to demand goods and services.
Unlike supply-siders, demand-siders believe focusing on consumption is the best way to drive economic growth. Firms will naturally increase supply and productivity to satisfy higher demand. More consumer spending also means higher living standards.
Key Differences in Perspective
Below we summarize some of the key differences between these two schools of thought:
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Focus – Supply-side focuses on production capacity while demand-side focuses on consumption.
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Drivers of growth – Supply-siders emphasize improved productivity. Demand-siders emphasize increased consumption.
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Policy approaches – Supply-side utilizes tax cuts and deregulation. Demand-side utilizes government spending and monetary policy.
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Philosophy – Supply-side takes a producer-focused view. Demand-side takes a consumer-focused view.
Both supply-side and demand-side economics aim for economic expansion. However, supply-siders take more of a producer/capacity approach while demand-siders take more of a consumer/demand approach.
Supply-Side Critique of Demand-Side Economics
Supporters of supply-side economics offer several critiques of demand-side policies:
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Temporary boosts – Demand stimulus like government spending may provide only a short-term boost. After this fiscal stimulus expires, the economy can sink back into recession. Long-run growth requires expanding supply.
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Inflationary pressure – Pumping up demand without regard for supply can lead to too much money chasing too few goods. This inevitably leads to price inflation which negatively impacts households.
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Debt concerns – Government spending must be debt-financed since higher taxes would negate the demand effect. Rising debt levels can drag on the economy.
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Market distortions – Artificially inflated demand disrupts normal market activity and prices. This creates inefficiencies as participants respond to inaccurate demand signals.
In essence, supply-siders cast doubt on demand management as a cure-all for growth. They argue that focusing on productivity and removing barriers to supply offers more meaningful, sustainable expansion.
Demand-Side Critique of Supply-Side Economics
Meanwhile, supporters of demand-side economics criticize supply-side policies in the following ways:
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Unproven impact – There is debate about whether tax cuts actually spur substantial additional investment and growth. The supply response may be limited while tax revenues fall.
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Slow growth – Even with supply expansion, if demand remains weak then unused capacity will persist. Consumption is needed to achieve full employment of resources.
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Income inequality – Supply-side policies like tax cuts often benefit high earners the most. Meanwhile, poorer segments rely on demand-side policies to increase their standard of living.
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Instability – Deregulation and globalization can make economies more prone to financial crises, shocks and downturns. Stable demand allows firms to confidently invest and grow.
Real-World Policy Mixes Both Approaches
In practice, most modern economies utilize a mix of both supply-side and demand-side policies. Elements like:
- Moderate tax rates to encourage investment and labor supply
- Targeted regulations to prevent market failures and abuse
- Government spending to provide public goods and social stability
- Monetary policy to foster stable prices and growth
Ideally, the right policy blend can enjoy the benefits of both schools of thought. Supply-side policies incentivize production while demand-side policies raise living standards.
Finding the optimal balance depends on the economic context and ideological persuasions of policymakers. But prudent policy is often a pragmatic mix of the two perspectives.
Economic Growth Depends on Both Forces
At their core, supply and demand are the two most fundamental forces in economics. An economy’s long-run potential is governed by its production possibilities on the supply side. However, realizing this potential requires adequate demand to incentivize maximum resource utilization.
Rather than treating supply and demand policies as substitutes, the two should be viewed as complements. Supply-side reforms expand an economy’s production frontier. Meanwhile, demand-side policies guide the economy toward full employment along that frontier.
Both forces play indispensable roles in driving sustainable, non-inflationary growth. A healthy economy needs responsive supply and buoyant demand.
So while heated political debates often pitch these policies against each other, the truth is that both supply-side and demand-side economics hold valuable insights. There are no simple answers in complex modern economies. But analyzing issues from both supply and demand perspectives can lead to more balanced solutions.
Supply does not create demand; demand is there whether supply sees it or not.
The distinction is an important one.
Let’s talk briefly about supply versus demand at a very rudimentary level.
- Supply is what you as a company do: It’s your business model; it’s how you make money; it’s the resources you have in that business.
- Demand is the consumer: They have things going on in their lives beyond your product or service; they have money they need to exchange for your product or service; they have time constraints.
The notion that the supply creates the demand causes companies to look at the supply side and ask, “What can we do?” Then they go build. Afterward, they turn around and ask, “Who will buy it?”
The problem with this approach is that when you talk to customers with a supply-side focus, you speak to them through the lens of your product or service and the conversation becomes aspirational.
“Do you want this?” you ask.
“Well, sure,” they say.
But that’s very different than them spending money and choosing one thing over another. The question was leading, so they told you what you wanted to hear. You are maximizing your supply-side efficiencies by getting customer buy-in for what you already built as opposed to understanding the true trade-offs customers are willing to make in the market.
At The Re-Wired Group we flip that lens, our team of product development consultants look at the demand first, which causes us to ask the consumer a different question: “What did you do?” We want to know about the circumstances that consumers were in that caused them to buy.
These are two very different ways to look at the world.
The Tale of Two Companies
Let’s take a bird’s-eye view of the difference between a supply-side and a demand-side approach to innovation: the original Segway versus Bird Scooters. Re-Wired doesn’t work for either company, but as an outsider, I can see that while both companies built devices for transporting people, they produced vastly different outcomes. Let’s take a look at each approach.
Segway took an insight—people don’t want to walk everywhere—and built a beautifully designed, expensive device to transport people. It’s truly a marvel of engineering. The product, launched to much fanfare in 2001, retailed for $5,000 and was touted as a revolution in transportation.
But despite all the hype, Segway never sold millions of scooters like they anticipated; they didn’t even sell hundreds of thousands. Now, twenty years later, the Segway brand is being retired. So, what went wrong? Segway was married to its solution and acted on an insight that did not tell the full picture of what people are trying to get done. What circumstances are people in when they don’t want to walk everywhere? Why choose a Segway in that struggling moment versus a bus, car, or bike?
Now let’s look at Bird Rides, which launched low-cost, rentable scooters in more than 100 cities across the world in 2017. Instead of looking at an insight—people don’t want to walk everywhere—Bird asked themselves, “What are people trying to get done?”
They found that people in big cities were often running late for work, and the bus schedule didn’t line up. If they ran, they would arrive sweaty; if they rode their bike, they would have to lock it up and worry it would get stolen. In tourist towns, the company realized that people wanted a way to stay out of their cars and enjoy their location without walking ten miles a day.
After recognizing the different “jobs,” they launched their scooters in specific market segments to fulfill the existing demand. Understanding that their customer did not want to be confined to drop-off locations, they loaded their scooters with GPS locators and hired people who would find the Birds at the end of the night and bring them back to charging locations.
As a result, Bird has become the fastest-growing company to reach the one-billion-dollar valuation and by 2018 had sold over ten million rides. So, while Bird lacks the “wow” factor of Segway, it serves a really good “job” need and therefore was a massive success in the market.
The Importance of Both Supply and Demand
I’m not advocating throwing supply out the window; both perspectives are important.
On the supply side, we must understand our business strategies and how to maximize efficiencies. But we must do that through the lens of demand. They are interdependent systems that can conflict with one another. The key is understanding the conflicts and making explicit trade-offs so that supply and demand are both happy—the result is acceptable to both.
At its core, supply asks, “How do I make it better, cheaper, faster?” and then looks at things like customer insights.
Demand asks, “How do we make our lives better?”
When we understand the two systems and how they come together, we’re able to build products and services with known trade-offs that are acceptable on both sides and that allow us to make better decisions. Neither side can convince the other to make trade-offs that are not effective for them. That’s why at Re-Wired, we look at them independently first to understand both systems before we try to see how they connect.
When I understand how to maximize efficiencies from the consumer lens, I can use that as an input to my supply-side system. When I understand demand, I can see how a product or service I made fits into people’s lives—when and where does this work?
If we understand that supply and demand feed each other, we can start to see the whole instead of seeing just pieces at a time. That’s where we make mistakes—missed opportunities—from both sides. You build products to sell, customer’s buy a product to make their lives better.
