What are the factors affecting demand and supply?

Answer 1

Factors affecting demand:

1. Price: when P goes up, demand goes down and vice versa.

THE CETERIS PARIBUS CLAUSE: if P changes, other factors will remain the same.

2. Prices of other products: when the price of beef goes up for example, the demand for pork will rise.

3. Nr. of population: if a lot of babies of born, demand rises as well (in this case for products used by babies).

4. Advertising: if there are loads advertisements for a certain product (which is okay), many people certainly will buy that product; so demand rises.

5. Fashion: as tastes change, demand for products change as well (if the fashion of 2010 is Nike, most of the people will buy Nike clothing - but if in 2011 it changes to Puma for example, those people following the fashion will get Puma clothing).

6. Income: we distinguish two type of goods if we are talking about income. Normal goods and inferior goods. With normal goods the demand rises when your income rises (more meat e.g.). With inferior goods the demand falls, when the income rises. For example: you will use your car more often (so more petrol as a good) when you have a higher income than using the public transport (in this example this is the inferior good).

Factors affecting supply:

1. Price: as with the demand factors, price also affects supply. But when P changes, other factors will remain the same!!! (the ceteris paribus clause).

2. Environmental conditions: sometimes whether plays an important role in the cultivation of products or if we want to say it in general: environmental conditions are of great importance when talking about supply.

3. Developments in costs: producing products has its costs and so does supplying. When the costs are low, there will be more supplied at all different price levels. The supply curve shifts to the right as a result (more supplied for the same P).

4. The position of technology: while technology improves, productivity rises due to the fact that there may be robotic production involved. So for the same amount of costs it is possible to supply more > supply curve shifts to the right.

5. The total amount of suppliers: if foreign producers enter a new (e.g. American) markets, supply increases as well.

Of course, there are a lot more factors in micro or macro economics affecting demand or supply, because these are two broad terms. However, these are the main points that are the most important.