DETERMINANTS OF DEMAND

Followings are the determinants or Demand

1. Tastes and Fashions:
Tastes and fashions change and are also
considerations etc.

affected

by

advertising, trends, health

2. The number and price of related goods: These are

a) Substitutes - the higher the price of substitute goods, the higher the demand will be for this good.
If the price of coffee rises then demand for tea will increase.
b) Complements - as the price of complements rises, demand for the complement falls and so too will
demand for the good in question. If the price of petrol rises then demand for cars will fall.
3. Income
As peoples income rises demand for goods and services rise too. Goods which obey this rule
are called - Normal Goods. However the exception to this is an inferior good. Demand for
inferior goods will fall as
Income rises. If margarine is considered an inferior good, as income rises, people will switch
to butter. The distribution of incomes will have an effect too.
4. Expectations of future price changes
If people expect prices to rise in the near future they will try to beat the increase by buying
early and
vice versa.
5. Population:

The size and makeup of the population affect demand. If there is a growing population more
food is
demanded. If the population is stable but is ageing (like Italy) things that old people need will
increase
in demand - i.e. health care
6. Change in consumer expectations:
With ever change in the expectations of the consumer due to what so ever reason change the
demand for a product which directly or indirectly effect the producer to supply

DETERMINANTS OF SUPPL
The determinants of supply are:
1. Costs of Production
a. Change in input prices: wages, raw materials etc.
b. Change in technology
c. Organization changes leading to increased/decreased efficiency
d. Government policy including taxes and subsidies
2. Profitability of alternative goods in supply.
If a farmer makes a greater profit from pineapples than rice, supply of rice will decrease and
pineapples increase.
3. Nature, random shocks Weather, earthquakes, wars, industrial disputes.

4. Expectations of future prices

If the price of a good is expected to rise the supplier may hoard stock (reducing supply now) in
order to benefit later (increase in supply later).
5. Profitability of goods in joint-supply
If the supply of beef increases there will be a corresponding increase in supply of leather as one
is a by- product of the other.
Any factor that increases the cost of production decreases supply
Any factor that decreases the cost of production increases supply

The Law of Demand and Supply

For a market economy to function, producers must supply the goods that consumers want. This is
known as the law of supply and demand. Supply refers to the amount of goods a market can
produce, while demand refers to the amount of goods consumers are willing to buy. Together,
these two powerful market forces form the main principle that underlies all economic theory.
The law of supply and demand explains how prices are set for the sale of goods. The process starts
with consumers demanding goods. When demand is high, producers can charge high prices for
goods. The promise of earning large profits from high prices inspires producers to manufacture
goods to meet the demand. However, the law of demand states that if prices are too high, only a
few consumers will purchase the goods and demand will go unmet. To fully meet demand,
producers must charge a price that will result in the required amount of sales while still generating
profits for themselves. We now explain the two laws as under

Law of Demand
Demand is the relationship between the quantities of a good or service consumers will purchase
and the price charged for that good. The law of demand states that the quantity demanded for a
good rises as the price falls, with all other things staying the same. The 'all other things staying
the same' part is really important.
There are other things that can affect demand besides price. They are prices of related goods or
services, income, tastes or preferences, and expectations. For example, if you really like Apple
products, you might not mind paying a higher price for the new phone that just came out. If you
get a new job and your income goes up, you might not mind paying higher prices for certain goods
because of your newfound wealth.
In simple language, we can say that when the price of a good rises, people buy less of that good.
When the price falls, people buy more of it, with other things remaining the same. The main
reason economists believe so strongly in the law of demand is that it is so believable, even to
people who don't study economics. The law of demand is ingrained in our way of thinking about
everyday things. Let's see if a few examples help reinforce this.
At higher prices, the quantity demanded is less than at lower prices. A demand schedule indicates
that, typically, there is an inverse relationship between the price of a product and the quantity
demanded. This relationship is easiest to see when a graph is plotted, as shown.

Demand Curve

Law of Supply
A microeconomic law that states, all other factors being equal remain the same, as the price of a
good or service increases, the quantity of goods or services that suppliers offer will increase, and
vice versa. The law of supply says that as the price of an item goes up, suppliers will attempt to
maximize their profits by increasing the quantity offered for sale.
The law of supply explains that if people are willing to pay more money for a product, a company
will produce or manufacture more of that product to capitalize on the increased revenue.

The law of supply is a fundamental principle of economic theory. It states that an increase in price
will result in an increase in the quantity supplied, all else held constant.

Supple Curve
An upward sloping supply curve, which is also the standard depiction of the supply curve, is the
graphical representation of the law of supply. As the price of a good or service increases, the
quantity that suppliers are willing to produce increases and this relationship is captured as a
movement along the supply curve to a higher price and quantity combination.
Demand & Supply Curves

In microeconomics, supply and demand is an economic model of price determination in a

market. It concludes that in a competitive market, the unit price for a particular good, or other
traded item such as labor or liquid financial assets, will vary until it settles at a point where the
quantity demanded (at the current price) will equal the quantity supplied (at the current price),
resulting in an economic equilibrium for price and quantity transacted.
The four basic laws of supply and demand are
1. If demand increases (demand curve shifts to the right) and supply remains unchanged, a
shortage occurs, leading to a higher equilibrium price.
2. If demand decreases (demand curve shifts to the left) and supply remains unchanged, a
surplus occurs, leading to a lower equilibrium price.
3. If demand remains unchanged and supply increases (supply curve shifts to the right), a
surplus occurs, leading to a lower equilibrium price.
4. If demand remains unchanged and supply decreases (supply curve shifts to the left), a
shortage occurs, leading to a higher equilibrium price.

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