Determinants of Supply and Demand

Determinants of Demand

T - Tastes of consumers

• Depending on what consumers think is desirable, the demand for various goods will shift up and down.
• This is also affected by advertising, health warnings, etc.
• Simply, if people want a good, demand rises, and vice versa

B - Buyers (amount)

• Naturally, if there are more buyers then demand will increase.
• Conversely, if the amount of buyers decreases there will be less demand for whatever good is demanded.

P - Price of related goods (substitutes and complements)

• If the price of a substitute falls, then demand for a substitute good will increase.
• Confused? Here's an example. If coffee and tea are substitute goods (buyers consumer either one or the other) and the price of coffee falls, then buyers are more likely to purchase coffee over tea.
• If the price of a complement falls, then demand for the complement will increase and so will the demand for the good in question.
• For example, if the price of peanut butter falls then the demand for jelly will increase along with the increase in quantity demanded for peanut butter.

I - Income

• As buyers' incomes rise the demand for some goods and services rises as well.
• Goods that follow this trend are called normal goods, and an example of this is whole wheat pasta.
• The opposite of these are inferior goods, and in this case when buyers' income rises the demand for those goods decreases.
• An example of this is canned soup.

E - Expectations of future prices

• If buyers expect that prices will rise in the future, then demand for that product will rise now.
• For example, if there's a 24-hour sale on the latest iPhone, sales will spike now in comparison to 24 hours later.
• Conversely, if buyers expect that prices will drop in the future they will hold off on buying that product. The stock market works in a similar way to this.

Determinants of Supply

T - Taxes and subsidies💵

• With higher taxes on suppliers, this means those suppliers will produce less to pay fewer taxes.
• In contrast, lower taxes means higher supply (suppliers will produce more).
• Subsidies are the opposite of taxes.
• If there are higher subsidies then suppliers will be motivated to produce more goods.
• Lower subsidies? Lower supply.

P - Prices of related products🏸

• If prices of related products increase, sellers will have more incentive to produce those other products.
• What does this mean? Supply of the current product will decrease.
• For example, if the price of coffee goes up and you’re a tea producer, then you’re going to stop producing tea in favor of coffee because you can make more money.
• Conversely, if prices in related markets decrease, then supply will increase in the present market.
• Why? Sellers can get better prices in their current markets over switching to a related market.

R - Resources (price)🌽

• Say you’re a baker and you need wheat for your bread. If the price of wheat increases then you’ll be able to buy less of it.
• This means supply will decrease since you can’t make as much bread.
• But, if wheat prices decrease then you’ll be able to buy more wheat with the same amount of money and produce more bread. This means supply increases.

E - Expectations of sellers📈

• If sellers expect that prices will increase in the future, then supply will decrease now because they predict a larger profit in the future.
• In comparison, if sellers expect price drops in the future, then supply will increase because they want to take advantage on higher prices now.

N - Number of sellers👫

• This one is quite simple to understand. If there are more sellers in a market, that means there are more products in circulation and supply increases.
• Conversely, with less sellers in a market, the amount of goods in a market decreases and hence, supply decreases.

T - Technology📱

• With improved technology, suppliers will be able to produce more goods and supply will increase.
• In comparison, when technology breaks down, supply will decrease since suppliers won’t be able to make as many goods.