Determinants of Demand and Supply

The law of supply and demand is employed in Economics to set the pricing of products and services in the marketplace. Understanding the ideas underlying this legislation will give you a better understanding of how the market operates. Let us now understand what we mean by demand and supply and what are their determinants.

 

 

Demand and Supply

 

What is Demand?

 

The amount of things that customers desire to purchase and have the purchasing power to acquire at a variety of prices is referred to as demand. Commodity demand will stay stable up to a specific price threshold. Buyers will find the items excessively expensive beyond that point, and demand for them will fall.

 

Demand is just a consumer's desire to purchase products and services without hesitation and pay the price for them. In layman's terms, demand is the quantity of items that buyers are ready and willing to purchase at various prices over a specific time period. Preferences and choices are the fundamentals of demand, and they may be expressed in terms of cost, benefits, profit, and other factors.

 

There are numerous factors affecting demand for a product. These range from price of the commodity, the cost of other commodities, the customer's earnings, and his or her likes and preferences. 

 

Demand for a commodity is the quantity of a commodity that a customer is willing to buy, is able to manage and afford at the given pricing of products, and the customer's likes and preferences. 

 

The demand curve is a graphical representation of the relationship between the price of a product or service and the quantity demanded over a specific time period. In most cases, the cost will be shown on the left vertical axis. A demand curve is the number (quantity) required on the horizontal axis.

 

What is Supply?

 

The amount of a commodity provided in the market is determined not just by the price of the commodity, but also by possibly many other factors, such as the pricing of replacement products, manufacturing technology, and the availability and cost of labor and other production factors. 

 

Analyzing supply in fundamental economic analysis is looking at the link between various prices and the amount possibly given by producers at each price, while maintaining all other factors that may impact the price constant.

 

These price-quantity combinations can be shown on a curve called a supply curve, with price on the vertical axis and quantity on the horizontal axis. A supply curve is often upward-sloping, showing producers' desire to sell more of the product they produce in a higher-priced market. 

 

There are many factors affecting Supply. Any change in non-price elements would cause the supply curve to vary, but changes in commodity price may be followed along a constant supply curve. 

 

The contemporary economy is built on supply and demand dynamics. Each product or service has its own supply and demand patterns depending on price, usefulness, and personal taste. Producers will increase supply if customers desire a good and are ready to pay more for it. 

 

Given the same amount of demand, the price will reduce as supply grows. Ideally, markets will find an equilibrium position when supply matches demand (no surplus supply or shortages) for a given price point; at this point, consumer utility and producer profits are maximized. 

 

(Also Read- Types of Elasticity)

 

 

Determinants of Demand and Supply

 

Now let us understand some of the major factors affecting the demand and supply of the products. 

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Determinants of Demand and Supply

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Factors affecting demand are:- 

 

1. Buyer's Income

 

The buyer's purchasing power and the demand for a product are determined by their income. An increase in income leads to increased purchasing power and demand, whereas a fall in income leads to decreased purchasing power and demand. There is also a link between income and commodity quality.

 

Quality items will see an increase in demand as income rises, whereas poorer goods would see a reduction in demand. However, if income declines, there will be less demand for high-quality items and more desire for low-cost ones.

 

2. Price of related services

 

In the case of complementary products , an increase in the price of one commodity reduces demand for the complementary product. For example, as the price of bread rises, so will the demand for butter. 

 

Similarly, an increase in the price of one item increases demand for a substitute product. For example, an increase in the price of tea will increase the demand for coffee and, as a result, lower the demand for tea.

 

3. Consumer Expectations

 

When customers expect a product's price to decline, they will wait to buy it when it is less expensive. In other words, demand decreases. However, if they predict the price to rise, they will buy more of the goods while it is still inexpensive.

 

4. Taste

 

Demand is influenced by changes in customer preferences. Demand for a certain item of apparel, for example, is particularly susceptible to shifting consumer fashion choices. The elasticity of demand relates to how sensitive a good's demand is to changes in other economic factors such as pricing and consumer income.

 

(Also Read - Factors affecting Consumer Behavior)

 

Factors affecting supply are:- 

 

1. Price of factors of production

 

An institution's supply curve is the curve that represents the least price at which the producer is willing to supply the product. As the price of the factors of production rises, so does the minimal price that the producer is ready to provide. As a result, supply falls and the supply curve moves to the left.

 

Cacao tree seeds, for example, were once used to make chocolate. If cacao seed costs rise, so will the cost of creating chocolate. As a result, supply is reduced.

 

2. Technology

 

The mechanism through which resources are employed to make commodities is referred to as technology. When more efficient procedures for producing a product are discovered and applied, production costs decrease.

 

As a result, supply rises and the supply curve changes to the right. Technological advancements assist to minimize manufacturing costs while increasing profit.

 

3. Price of related products

 

The pricing of a firm's goods and replacement goods impact the supply of the relevant product. It means that if the price of another item that a business can manufacture rises, firms will produce more of it and less of what they used to produce.

 

In the manufacturing process, alternative products are items that can be produced using the same resources. When the price of green gramme is relatively high, for example, land used for maize cultivation can be used for green gramme cultivation. The corn supply then drops.

 

4. Producers Expectations

 

Changes in producer expectations have an impact on the existing supply of the commodity. It is unclear how pricing expectations will impact current supply because they will differ based on the nature of the commodities.

 

Producers, for example, are increasing their supply in anticipation of higher industrial product prices in the future. Current supply is affected by expectations of a change in any factor impacting future profitability. Import restrictions and company taxation are two examples.

 

5. Number of Producers in the market

 

The market's supply is also affected by the number of providers. When the number of suppliers rises, so does the supply, and when the number of suppliers falls, so does the supply.

 

6. Government policies

 

Government policies can be identified as a supply factor. The government's various laws, taxes, and production subsidies all have an impact on supply. Taxes on commodities, for example, will raise the marginal cost of manufacturing. 

 

Production subsidies, on the other hand, will lower marginal costs. As a result, the minimum price at which the items must be delivered is increased or lowered.

 

(Also Read - What is Marginal Utility?)

 

 

Market Equilibrium or Balance between Demand and Supply

 

The pricing mechanism in a free market equalizes supply and demand. Buyers will tend to bid up the price if they want to buy more of a good than is available at the current price. Suppliers will bid prices down if they want to buy less than what is offered at the current price. 

 

Thus, the price mechanism decides the quantity of commodities to be produced. The pricing system also decides which things will be created, how they will be produced, and who will get them—that is, how the goods will be dispersed.

 

Consumer goods, services, labor, and other salable commodities may be created and dispersed in this manner. In either situation, an increase in demand will cause the price to rise, causing producers to provide more; a reduction in demand will cause the price to fall, causing producers to supply less. 

 

As a result, the pricing system provides a simple scale on which opposing demands may be weighed by any consumer or producer. The economic connection between sellers and purchasers of various commodities is defined by the law of supply and demand. 

 

According to supply and demand theory, the price of a product is determined by its availability and customer demand. If the price of the product is high, the sellers will offer more of it to the market. 

 

Keeping the price high, on the other hand, might have a negative impact on how purchasers perceive the product. If clients do not believe the product is worth the high price, they may choose for a less expensive alternative. A higher price may result in decreased demand, which may result in a decrease in supply.