What are the factors that affect supply and demand?

  • Supply and demand are not fixed . They can change depending on different things that happen in the world. These things are called factors . Factors can make supply and demand go up or down, or shift to the right or left.

  • When supply or demand shifts , it changes the price and quantity of a product in the market.

  • For example, if the demand for ice cream goes up, the price and quantity of ice cream will also go up. If the supply of ice cream goes down, the price will go up and the quantity will go down.

Factors that affect supply

  • Cost of production : This is how much it costs to make a product. It includes the costs of labor, materials, machinery, and other inputs. If the cost of production goes up, the supply will go down. If the cost of production goes down, the supply will go up. For example, if the price of milk goes up, it will cost more to make ice cream, so the supply of ice cream will go down.

  • Number of sellers : This is how many producers are in the market. If the number of sellers goes up, the supply will go up. If the number of sellers goes down, the supply will go down. For example, if more ice cream shops open in a town, the supply of ice cream will go up.

  • Technology : This is how advanced and efficient the production process is. If technology improves, the supply will go up. If technology worsens, the supply will go down. For example, if a new machine can make ice cream faster and cheaper, the supply of ice cream will go up.

  • Expectations : This is what producers think will happen in the future. If producers expect higher prices in the future, they may hold back some of their current supply to sell later. This will make the current supply go down. If producers expect lower prices in the future, they may sell more of their current supply now. This will make the current supply go up. For example, if ice cream shops expect a hot summer, they may keep some of their ice cream in storage to sell later when demand is high. This will make the current supply of ice cream go down.

Factors that affect demand

  • Price of related goods : This is how much other products that are related to the product cost. There are two types of related goods: substitutes and complements.

    • Substitutes are goods that can be used instead of the product.

    • Complements are goods that are used together with the product.

    • If the price of a substitute goes up, the demand for the product will go up. If the price of a substitute goes down, the demand for the product will go down.

    • If the price of a complement goes up , the demand for the product will go down.  

    • If the price of a complement goes down , the demand for the product will go up .

    • For example , if the price of frozen yogurt goes up, people may buy more ice cream instead, so the demand for ice cream will go up. If the price of cones goes up, people may buy less ice cream with cones, so the demand for ice cream will go down.

  • Income : This is how much money consumers have to spend. If income goes up , consumers can buy more products, so the demand for normal goods will go up.

    • Normal good s are goods that consumers buy more of when they have more money.

    • If income goes down , consumers can buy less products, so the demand for normal goods will go down.

    • However, some goods are called inferior goods.

    • Inferior good s are goods that consumers buy less of when they have more money and buy more of when they have less money.

    • For example , if income goes up, people may buy more expensive desserts like cake or pie instead of ice cream, so the demand for ice cream (an inferior good) will go down.

  • Preferences : This is what consumers like and dislike. Preferences can change due to trends, fashions, seasons, advertising, and other influences .
     
    • If consumers prefer a product more, they will buy more of it, so the demand will go up .

    • If consumers  prefer a product less, they will buy less of it, so the demand will go down.

    • For example, if Ice cream becomes more popular due to a celebrity endorsement, the demand for ice cream will go up.
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Davneet Singh

Davneet Singh has done his B.Tech from Indian Institute of Technology, Kanpur. He has been teaching from the past 14 years. He provides courses for Maths, Science and Computer Science at Teachoo