Demand & Supply: Factors Influencing Market Dynamics

Posted on Mar 19, 2025 in Economics

Factors Affecting Demand

1. Income: Changes in consumer income influence the quantity demanded. However, the effect varies depending on whether a good is normal or inferior.

• Normal Goods: An increase in income leads to an increase in the quantity demanded. Conversely, a decrease in income leads to a decrease in the quantity demanded.
• Inferior Goods: An increase in income leads to a decrease in the quantity demanded. Conversely, a decrease in income leads to an increase in the quantity demanded.

2. Price of Related Goods

Substitute Goods: These goods satisfy similar consumer needs.

Complementary Goods: These goods are consumed together.

• Substitute Goods:
  • Price Increase: May benefit the demand for your product as consumers switch.
  • Price Decrease: May reduce the demand for your product as consumers opt for the cheaper alternative.
• Complementary Goods:
  • Price Increase: May reduce the demand for your product, as the overall cost of consuming both goods increases.
  • Price Decrease: May increase the demand for your product, as the overall cost of consuming both goods decreases.

3. Consumer Tastes

Changes in consumer preferences can significantly impact demand, sometimes more than price changes.

Example: A loyal Coca-Cola consumer may not switch to another drink even if it’s cheaper, unless the price of Coca-Cola becomes prohibitively expensive.

4. Population

Population size directly affects the overall demand in the market.

• Population Increase: Leads to an increase in quantity demanded.
• Population Decrease: Leads to a decrease in quantity demanded.

Factors Affecting Supply

1. Costs of Production

Costs are directly related to the quantity supplied.

• Market Price Increase: Leads to an increase in quantity supplied.
• Market Price Decrease: Leads to a decrease in quantity supplied.

Therefore, the supply curve is upward sloping.

2. Climatic Conditions

Weather can significantly impact the quantity supplied, especially for agricultural products.

• Favorable Weather: Increases quantity supplied.
• Unfavorable Weather: Reduces quantity supplied.

3. Substitutes in Production

These are goods that can be produced with the same inputs. Companies will allocate resources to produce the most profitable goods.

Example: A company that produces both husks and boots will shift production towards husks if the price of husks increases, even if the price of boots remains the same.

4. Complements in Production

These are goods that are produced jointly. Producing one automatically results in the production of the other.

When…