Factors affecting Supply and Demand.

Factors affecting Supply and Demand

Economic require us to study demand and supply in order to understand consumer behaviors and the determination of price levels. Demand, in definition, is “the quantity of goods or services that will be bought at any given price over a period of time and supply is the willingness and ability to sell a good or service”. (Alain Anderton, 1991, Economics Third Edition) A market exists wherever there are buyers and sellers of a particular good. Buyers demand goods from the market whilst sellers supply goods to the market. The same as the supply, individual and market demand information can be expressed in the form of curve.

Now I will examine factors that represent shifts in demand and supply curves. Firstly, I will consider the demand curve. Think about what factors determine how much of some goods you want to buy.

Price of the good is really a significant factor. When we talk about quantity demanded, normally we are take place on a given demand curve. The price of good is only that affects these curves will have changed. If something others have changed, the demand curve change. It is not hard to image if the average price of a house were to fall from ￡80,000 to ￡40,000, then it is not difficult to guess that the quantity demanded of houses would rise. On the other hand, if the average were ￡35,000 very few cars would be sold. Economists have found that the opposite relationship between price and quantity demanded, if price rises, the quantity demanded falls.

Price is not the only factor that determines the standard of demand for a good. Another important factor is income. If demand increase as income increases we say that the good is the normal good. This means that the demand curve will shift to the right if income increases and shift to the left if income decreases. For example, a rise income leads consumers to buy more clothes. There are a few kinds of goods, fall in demand when income rises.

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Furthermore, changes in prices of other goods can also cause demand to change. When it happens, the two goods are substitutes. They can be used as the same and similar purpose. Examples of substitutes can be tea and coffee, water and soda. For substitutes, if the price of one good decreases then the demand for the other also decrease. If the price of a good increases then the demand for all substitutes will increase. Also we can use two goods together. The goods might be houses and furniture, cars and petrol. These goods are called complements. Accordingly, if the price of car falls then it is likely that people will want more petrol so demand for petrol will increase. If the price of petrol raises then less cars and petrol will be purchased so demand for petrol will decrease. In general, “if the price of a good raises (falls) then the demand for all complementary goods will fall (rise)”. (John Sloman, 1997, Economic Third Edition)

There is another example exist in British society can prove the price of good (or service) and other prices of goods (or service) can influence the demand curve. In the First world, especially in British labour is relatively expensive, such as nurse and housekeeper. But in the third world, labour is cheap. So the firms in Britain demand the labour from the third world. In some non-technical trades, normally we can see the foreigners work for the part or full time to satisfy the social need.

There are wide variety of other factors that affect the demand besides price, income and the prices of other goods. The demands for some goods and services are very impressionable to changes in the taste and fashion. Particularly affected are the clothing trades, but industries such as producing furniture and processed foods are also subject to movements in taste and fashion. Teenager group pressure can influence demand for products. For example, many youngsters influenced by their friends, they prefer mountain bikes rather than ordinary bikes. What else, advertising, weather, time period and population are also can cause of changes in demand. Each of the above factors is held fixed when drawing the demand curve for a product. If one of these factors changes then the demand curve will shift.

Now we consider the factors affecting the supply. The same as demand, the price of good also can change the supply curve. In general, “quantity supplied will rise if the price of the good also rises, all other things being equal”. (Alain Anderton, 1991, Economics Third Edition) There are factors except the price of one good determine how much of one good a competitive firm wants to produce. These factors include:

Changes in the prices of other goods

Changes in the prices of other goods and services may affect the supply because if demand increase, the price of other goods and services increase, the resources of the good would tend to move towards the industries making those more profitable products. The production of goods and services, with prices unchanged, would now be less attractive to suppliers.

In the case of products that are substitutes in supply, a rise in the price of one product will cause the supply of that product to extend and the other products to decrease. However some products are in joint supply, for instance, petrol and paraffin. So if there is a rise in the price of petrol this will cause the supply of petrol to extend and the supply of paraffin to increase.

Changes in the number of producers

Supply will increase if new firms enter the market. For instance, in the 1990s the number and range of magazines for sale increased with the rise in the number of producers may use desktop publishing.

Technological progress

Technological progress is a term that include improvements in the performance of capital goods and labor, in the quality of raw materials, in organization and management, in communication, in methods of production, and so on. It is the main source of improvements in productivity and these increases in output per hour will move the supply curve to the right, because if other things remain unchanged, the average costs of production will fall.

Disease

The output of agricultural products can also be affected by disease affecting crops and disease and illness affecting livestock. Such as the foot-and-mouth epidemic in Britain 1997 has influenced the supply for the lamb a lot.

Weather

The supply of agricultural products is seriously affected by variation in weather conditions. A bad harvest means that the supply curve moves to the left, a bumper harvest is represented by a shift of the supply curve to the right.

The other factors that have been identified as important in determining supply behavior include prices of inputs, expectation about future prices and time period being considered.

A simple example can give you an overall realize about the factors affecting demand and supply. Rose as it’s delicate and charming is very popular in Britain. Valentine's Day requires the heaviest demand for long-stemmed roses, and several rosebuds must be in order to create a single long-stemmed rose. After the Christmas season demand for red roses is filled, growers need 50-70 days to produce enough roses for Valentine's Day. Winter's shorter daylight hours and higher energy costs obstacle to grow large rose crops. Inclement weather often requires extreme measures to ensure that flowers are delivered in time. To fulfil the number of orders for Valentine's Day flowers, florists have to hire more help, work longer hours and get extra delivery vehicles and drivers.

From the information above, I’ve almost analyzed the factors affecting supply and demand. In the economic theory, demand is seem to be emerging more important and effective on price mechanism than supply. But relatively, supply joins demand as one of the components of fundamental commodity market analysis. An understanding of the factors affecting supply and demand in the past will help with the development of supply and demand expectations in the future and the impact upon market price.

Bibliography: Alain Anderton, 1991, Economics Third Edition

John Sloman, 1997, Economic Third Edition