Factors Affecting Demand and Supply in Economics

The force of demand and supply are two important concepts that govern the economy of every country. Human wants are unlimited, voluminous and can never be completely satisfied. The more the demand for a goods, a proportional supply of that goods, at least, will have to be produced. In this article, we shall try to examine the meaning of Demand and Supply, the Laws of Demand and Supply and the factors affecting Demand and supply in economics.

In light of the above, It is imperative to pay good attention to the information shared in every paragraph of this work, as it is important to understand the main aim. So, before we continue, what is the meaning of demand?

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Meaning of Demand in Economics

In Economics, the word “demand” simply refers to the quantity of a commodity which consumers or buyers are willing and to buy at a give price and time. Demand is obviously not the same as the terms “Want” or “Need“. To an economist, Want and Need are just mere desire for a commodity. This desire is not backed up with the willingness and ability to pay for it.

Take for Example, If Mr. Edeh Samuel has the money to purchase a private jet and is able to pay for it, then he has the effective demand for the car. But if, on the other hand, he desires to have a motorcycle and he does not have money and therefore unwilling to pay for it, he merely wants or needs the motorcycle and has no effective demand for it.

The Law of Demand in Economics

The Law of demand states that;

“All things being equal, the higher the price, the lower the quantity of goods that will be demanded; or the lower the price, the higher the quantity of goods that will be demanded.”

This law is often regarded as the first law of demand and supply. It simply means that when the price of a commodity is high in the market, very few quantities of it will be demanded by the consumer and vice versa.

Having explained the meaning of demand and the law of demand with various examples, we will now discuss the various factors that affect demand and supply in economics.

Watch the video below for a better explanation of the meaning of demand and the law of demand in economic ?

https://www.youtube.com/watch?v=QvGLcCTXk9o

Factors that affect demand in economics

Below are some of the factors that affect demand:

(1) The Price of the Goods or Services:

The most important influence on the quality demanded of any commodity is its price. All commodities are competing for the limited incomes of households. The price to be paid for any commodity enables the consumers to compare the satisfaction he gets from buying one commodity with that obtained from buying another.

(2) Prices of Other Goods and/or Services:

Since all commodities are competing to be the best in every household, some commodities competing more directly or obviously with one another than others, changes in the prices of other goods will affect the quantities of the particular commodity purchased. The direction and magnitude of the effect depend on whether these other goods are substitutes or are complementary.

If the goods are substitutes,then a rise in the price of commodity may lead to a fall in the quality of that commodity bought while the demand for it’s substitutes will increase. For instance,an increase in the price of coffee may lead to a fall in the demand for it ,but the demand for tea, which is a good substitute for it,may increase.

For complementary goods, a rise in the price of one may lead to a fall in the quantities demanded of both the good and it’s compliment ,even though the price of the compliment is relatively cheaper. For example,if the price of milk goes beyond the reach of costumers, the demand for the tea will fall even if tea costs relatively much cheaper.

(3) A Change in Real Income:

The household’s incomes play a large part in determining the quality and the type of goods and services that are purchased.  Normally a rise in income may lead to a increase in the quality of goods purchased, and it may lead to the purchase of the good which were previously considered out of reach to the consumer. Consumption of luxury goods comes into consideration when real income increases.

(4) The Tastes, Fashion and Preferences of Consumers:

Tastes and fashion change from time to time. These days, advertisement has a compelling pressure and influence on the buying habits of the population. Religious, moral and psychological factors influence the demand pattern for certain goods. When tastes change in favour of a particular commodity, quality demanded of that commodity increase;when tas te changes in favour of some other commodity the quality demanded of the first commodity falls.

(5) The Size of the Population:

Normally a family of eight persons require more food, clothes, and so on, than a household of three persons. Therefore, when population increases,there will be greater demand for goods and services such as food, clothing, housing and entertainment.

(6) The Distribution of Income Among the Population:

The quality of goods demanded depends upon the distribution of income in the society. It is said that the lower income group displays a high propensity to consume while the high income group saves more of it’s income. Those who earn 150 a month are more likely to spend it all on the basic necessities of life than those who earn 800 a month.

The man who earns N=800 a month is more likely to set aside a large portion of it as savings, after spending part of his income on basic necessities. Therefore,any measure which redistributes income so that the man who earns 150 gets about 300 will change the pattern of demand.

(7) Expectation of a Change in Price:

A rumour of possible shortages in certain goods tends to induce many customers to buy and hoard goods which they do not normally need.
Such a stampede in purchasing leads to high prices. It also increases the quality of goods purchased.

(8) Weather and Climate:

Variations in weather and climate,or season, may affect demand for goods such as raincoats,rain boots,ice cream and soft drinks.

(9) Government Policy:

The government policy over the consumption of some goods may discourage or encourage the demand for them.

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Meaning of Supply

In a simple language, Supply is the quantity of a commodity which a producer is willing and able to offer for sale at a particular price and at a particular period of time. It can also be said to be the quantity of a commodity which producers are willing and able to sell at a given price over a period of time.

From the definition above, It is also imperative to note that the supply of a commodity is different from the total stock of a commodity which the producer has produced.

The law of supply in economics

Just like demand, the law of supply states that;

“All things being equal, the higher the price, the higher the quantity of a commodity that will be supplied or the lower the price, the lower the quantity of commodity that will be supplied. This law is referred to as the second law of demand and supply.”

Below is another awesome video that can help you understand the meaning of supply and the law of supply:

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Factors that affect supply of goods in economics

Below are the factors that affect supply in economics

(1) The Price of the Commodity:

As a general rule, more of a commodity will be supplied at a higher price than at a lower price. A favourable price induces a greater supply of the commodity.

(2) Prices of Other Commodities:

The supply of a commodity will be affected if the prices of other commodities rise. This is because the increase in the prices of other commodities will attract and encourage more production of those commodities and less production of the commodity whose price has fallen or has remained the same. This happens mostly to goods which are substitutes.

(3) Changes in the Cost of Production:

If the producer has to pay more for his factors of Production,he will change a higher price for his final product in order to cover his cost of production.All things being equal, a higher cost of production tends to reduce supply while a lower cost of production tends to increase supply.

(4) A Natural Disaster or Some Other Catastrophe:

A plague of insects,flood, drought,fire, war or epidemic will affect the supply of commodities. In the poultry industry, for example,an epidemic is a common occurrence. When it takes place, the supply of eggs falls despite favourable prices.

(5) Government Policies:

Government policy, particularly on taxation, can affect the condition of supply. For example, a tax on poultry farming equipment or poultry products will cause a decrease_while a subsidy given to poultry farmers, in terms of free importation of equipment and poultry feed, will effect an increase in the supply of eggs.

(6) Entry of New Firms:

If there is free entry into the industry or market, it will generally result in an increase of supply.  When, for example, new poultry farmers join the industry, more eggs will be available for sale.

References:

Ande .C.E. (2008) Essential Economics for Secondary Schools

Ewa Udu est G. A. Agu (1989) New System Economics for A Senior Secondary Course