Determinants of Supply and Demand

Determinant of Demand #1 - Consumer Tastes/preferences

Demand to the right if more of a good is preferred, to the left if less is preferred.

Determinant of Demand #2 - Number of buyers in the market

More buyers = more demand

Less buyers = less demand

Determinant of Demand #3 - Consumer incomes

Superior/Normal Good: Goods whose demand changes based on the price of the good. Direct variation with money.

• If incomes go up then demand goes up for this

Inferior Goods: Goods whose demand varies inversely with monetary income.

Determinant of Demand #4 - Price of related goods

Substitute good: One that can be used in place of another good. Increased demand for a substitute good leads to decreased demand for the good.

“One or the other”

Complementary goods: A good that is used with another one, and demand for both goods is linked—increased demand for a complementary good leads to higher demand for the main good.

Unrelated goods: A change in the price of one good has no effect on the other good.

Determinant of Demand #5 - Consumer expectations of future prices

If future prices are predicted to be higher, consumers will buy more now. If they are predicted to decrease then consumers will hold off and purchase later.

Determinant of Supply #1 - Resource Prices

Higher resource prices = higher production costs and less profits, lowering the amount of production. Lower resource costs = lower production costs and more profit, increasing the amount of production.

Determinant of Supply #2 - Technology

Technological advances increase supply with the same resources.

Determinant of Supply #3 - Taxes & Subsidies

More taxes = less supply (less profitable), subsidies = more supply (more profitable).

Determinant of Supply #4 - Prices of other goods

Depending on the other goods that may be more/less profitable supply either increases or decreases. If other, more profitable goods can be produced then the supply of the less profitable good will decrease.

Determinant of Supply #5 - Producer Expectations

If selling the good will be more profitable in the future then the business will withhold their stock to sell it in the future.

Determinant of Supply #6 - Number of Sellers in the Market

Assuming all other things equal, if the number of suppliers increases, the amount of supply will also increase.