Canadian CANNAINVESTOR Magazine October 2017 - Page 120

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Supply and Demand

The lower the price of a typical good or service the greater the demand should be. There are exceptions to this basic tenet but this industry is considered to be the norm. Therefore, the lower the price the less companies are lining up to produce and supply it (all things being equal). Demand and Supply also includes access and availability. For example, if the entire supply of a product is located in the northern most reaches of the Yukon it sounds like both the demand for it and the supply of it will be quite limited; however, if purchases could be made online with free shipping then that geographical barrier has been essentially removed. A basic demand curve and supply could be represented by the solid black lines D1 and S1 on the graph that follows.

Demand and Supply lines tend to be non-linear (curved with a changing slope); however, for simplicity we will use a linear relationship (straight lines) as it is the concepts and principles that are relevant. For our purposes, let’s assume this is the expected Canadian market for legal adult recreational marijuana. In theory, the all-in price of the product will settle at or around “market price” and will be supplied accordingly.

A basic supply and demand curve assumes there is no misinformation, no barriers to entry, ease of access, etc. A “perfect” environment to the producer and the consumer. In Economics, this is referred to as “Perfect Competition” and has five criteria:

1) All firms sell an identical product;

2) All firms are price takers - they cannot control the market price of their

product;

3) All firms have a relatively small market share;

4) Buyers have complete information about the product being sold and the

prices charged by each firm; and,

5) The industry is characterized by freedom of entry and exit. Perfect

competition is sometimes referred to as "pure competition".