Determinants of demand and supply

courtesy of Bill Watterson

The demand and supply curves of the global market are every changing and they move up and down, left and right on the graph all the time. Always finding a new equilibrium. What causes these curves to move?

Determinants of Demand

• Trends, tastes and fashions. When a product is popular, the demand increases and the price may become a little inelastic and it will increase.
• The number and price of related goods. 
• Substitutes. When the price for a certain type of of product increases, consumers would usually opt for the cheaper alternative that is similar to that product. For example, liquid soap and bar soap. When the price for liquid soap increases, more consumers would buy bar soap instead and this will increase the demand of bar soap.
• Complements. When the price of a type of product increases, other products that rely on will also suffer a drop in demand. For example, if the price of televisions increases, the demand for them may drop. Consequently, DVDs and VCDs will also suffer a drop in demand. If there aren't any televisions, how can you play DVDs? 
• Income. When the income of consumers rise, the demand for products will also rise as the opportunity cost of buying products will decrease. If the opposite happens, in which the income of consumers decrease, the demand for products will then increase and people may switch to buying products that seem to be 'cheaper' and of 'lower quality'.
• Expectations of future price changes. When consumers predict that prices will increase in the future, they will buy early and therefore increase the demand at that certain period of time. If the predict that prices will fall, the demand will then drop as people would buy less and wait for the prices to drop.
• Population. As explained in earlier post (What to produce?), the target consumer population can increase or decrease the demand of certain products.

courtesy of Eric Allie

Determinants of Supply

by Brian Girouard

• Costs of production. If the costs of production increases, the supply of goods will decrease. Causes of production costs increase includes:
• Changes in input prices: wages, raw materials
• Changes in technology: machinery
• Organization changes that lead to a change in efficiency
• Governmental policies like taxes and subsidies
• Profitability of alternative goods in supply. Businesses often produce more than one type of good. So if one type of product gains more profit than the other, the supply for that product will increase. For example, when selling shoes and socks. If shoes gain more profit, than the supply for shoes will increase while the supply for socks will decrease.
• Nature:
• Natural disasters
• Weather and climate
• These causes cannot be prevented but if they are severe they can really cause a lot of damage or change to the supply and production line.
• Expectations of future prices. As stated previously in the determinants of demand, the same applies to the supply as well. If a product is selling very well and is expected to be gaining a lot of profit, more of this product will be produced and stocked up. The same applies vice versa. 
• Profitability of goods in joint-supply. Just like the one of the determinants of demand, if a complementary product does very well, similar products will also increase in supply. For example, if computers are selling very well, the supply for other computer devices like keyboards, thumb drives and CDs will increase in supply as well.