DETERMINANTS OF DEMAND
1.Tastes and Fashions
Tastes and fashions change and are also affected by advertising,
trends, health considerations etc.
2. The number and price of related goods
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.
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 people’s 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 make up 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.
DETERMINANTS OF SUPPLY
1. Costs of Production
a. Change in input prices: wages, raw materials etc.
b. Change in technology
c. Organisation 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.