What is Demand?
Demand refers to the quantity of goods that consumers are willing to buy at given level of income during a given period of time. In order to understand the relationship of demand with different variables, let’s take a look at the factors that can influence demand.
Factors affecting demand
- Price of the Given Commodity: One of the most important factors affecting the demand of the commodity is its price. An inverse relationship exists between price and demand of a commodity. This means that as the price of a good increases its demand falls due to fall in the level of satisfaction of the consumer.
- Price of Related Goods: Demand of a product is also determined by the prices of other related products. Related products include Complementary and Substitute goods. Complementary good refers to goods that are usually bought together by consumers. For example, pencil and erasers. If the price of pencils goes up, the demand for erasers also decreases because they are used together (direct relationship). Substitute goods refer to goods that can replace each other. For example, Coke and Pepsi. If the price of Coke increases, the demand for Pepsi would increase. (inverse relationship)
- Income of the Consumer: Income of a consumer plays a major role in determining the demand of the product. Higher level income groups generally have higher demand than lower level income groups. If the income of a consumer increases, his demand and purchasing capacity also increases (direct relationship).
- Tastes and Preferences: Tastes and preferences of the consumer directly influence the demand for a commodity. They include changes in fashion, customs, habits, etc. An individual who prefers rice over bajra might not get affected by the increase in the price of rice where as a small increase in price of bajra will discourage them to buy bajra.
- Expectation of Change in the Price in Future: If the price of a certain commodity is expected to rise in future, then consumers will demand more of that product in the future than they normally would. There exists a direct relation between expectations of change in prices in future and its demand in current period of time.
What is Supply?
In economics, supply is the amount of a resource that firms, producers, laborers, providers of financial assets, or economic agents are willing and able to provide to the marketplace or directly to another agent in the marketplace.
Factors affecting Supply
- Price of the given Commodity:
Price of a commodity is one of the most important factors which determine the supply of a commodity. Generally, price of the commodity and its supply are directly related, that is as the price of product increases, its supply will also increase and vice-versa. The price rise in the market promotes the producers to produce more, in order to earn more in the market. - Prices of Other Goods:
The quantity supplied of a commodity depends not only on its price, but also on the prices of other commodities. Increase in the prices of other goods makes them more profitable in comparison to the given commodity. As a result, the firm shifts its limited resources from production of the given commodity to production of other goods, reducing its supply (Inverse relationship). - Prices of Factors of Production (inputs):
If there is a rise in price of factors of production like:- land, labour, capital etc. the cost of production also increases as a result of which the product becomes less profitable and suppliers might reduce the production of that commodity and vice-versa (inverse relationship).
4. State of Technology: Advancements in technology plays a major role in determining the supply of the product. Introduction of new technology in the market reduces the cost of the product which increases the profit margin and induces the supplier to increase production of the product.
- Government Policy (Taxation/ Subsidy Policy):
Increase in government taxes reduces the profit margin of product due to increase in the cost. This demotivates the supplier as a result of which he will reduce the production of that particular commodity (inverse relationship).
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