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org/economics-finance-domain/microeconomics/supply-demand-equilibrium/demand-
curve-tutorial/a/what-factors-change-demand

Supply and demand are among the most important concepts in economics. They drive the prices of goods and services
in a market economy, as well as salary levels. – Demand represents how much of a product or service people want. –
Supply represents how much (the quantity) of a good or service a market can provide or offer. The amount of a product
people are willing to buy at a price is “the quantity demanded.” The relationship between demand and price is called the
demand relationship.

 The relationship between the amount of products and services that are for sale and the amount that people
want to buy, especially in the way this affects prices
 Consumers will typically continue buying goods if the fulfillment that comes from the goods or service is worth
the price they pay.
 Likewise, suppliers will continue to provide goods if they can sell the them at a profit, i.e., the cost of production
is less than the sale price.
 This relationship allows us to find the “market price” for goods or services

Basic Principles of Supply and Demand

❖ If supply stays the same and demand increases, then a shortage will occur. This causes the equilibrium price to
increase
❖ If supply stays the same and demand decreases, then a surplus will occur. This causes the equilibrium price to
decrease
❖ If supply increases and demand stays the same, then a surplus will occur. This causes the equilibrium price to
decrease
❖ If supply decreases and demand stays the same, then a shortage will occur. This causes the equilibrium price to
increase
❖ Whenever there is a shortage, prices increase, inversely with every surplus there will be a price decrease.

What is demand-Desire for customer to purchase a good must be backed by the money/ability
to pay for the good.
A change in any one of the underlying factors that determine what quantity people are
willing to buy at a given price will cause a shift in demand.

quantity demand for goods and services is the number of goods and services that is
purchased at certain price in a given period of time.

Law of demad
 there is an inverse relationship between price and quantity demanded.
 the higher the price of goods , the lower the quantity that will be demanded of the
goods
 the lower the price of goods, the higher the quantity that will be demanded of the
goods
 the demand curves slope downward from left to right
 for example, the price of chicken decreases, the quantity demand for chicken will
increases.

2017 5) Factor affect demand https://www.economicshelp.org/microessays/equilibrium/demand/

1. Income of consumers. An increase in disposable income enabling consumers to be able to afford more
goods. With an increase in income, Power of consumers will increase ， purchase larger quantities,
pushing demand to the right, and causing the demand curve to shift right.
2. price of substitutes. A substitute is a good or service that can be used in place of another good or
service. An increase in the price of substitutes, e.g. if the price of clay roof tiles increases, this will
increase the demand for concrete roof tiles – a major substitute for the clay roof tiles . Example; if rental
goes up, maybe better buy own house
3. Change in taste Customers’ tastes increases, increasing the quantity demanded. For
example,Consumer prefer to stay in a condominium rathe than house terrace because of the
comfortable and security. hence, it will increase the demand of condominium in the market.
4. Advertising can increase brand loyalty to goods and increase demand. For example, higher spending
on advertising by Coca Cola has increased global sales.
5. interest rate- interest rate decrease, purchasing power rises, less money needed to buy fixed bundle of
goods, consumer can save more money, supply of credit rises, interest rate falls. hence, businesses and
houses can hold borrow more at lower interest rate and they will intend to buy more goods which
increase demand.
6. Credit facilities. If it is easier and cheaper to borrow, this may increase power of purchasing and
encourage consumers to buy expensive items on credit, for example, cars and foreign holidays.
7. Quality of goods. An increase in the quality of the good consumer are willing to purchase the good
quality on higher prices because it reaches her demand. e.g. better quality digital cameras encourages
people to buy one.
8. price of Complements. meaning that the goods are often used together, because consumption of one
good tends to enhance consumption of the other. A fall in the price of complements will increase
demand. E.g. a lower price of Play Station 2 will increase the demand for compatible Play Station
games.
 9. Weather: In cold weather, there will be increased demand for fuel and warm weather clothes.
10. Expectation of Change in the Price in Future Expectations of future price of houses increases.
consumer may think it might go up in the future, they will buy the houses now increase demand of
house.
11. Consumers express their interest in purchasing a good or service and exhaust available supply, which
will generally result in an increase in demand.
12. A complement refers to a complementary good or service used in conjunction with another good or service.
Usually, the complementary good has little to no value when consumed alone, but when combined with another
good or service, it adds to the overall value of the offering. An increase in the price of complementary goods
leads to a decrease in the demand for given commodity and vice-versa. For example, if the price of a
complementary good like condensed milk increases, then demand for given commodities as coffee will slightly
fall as it will be relatively costlier to use both the goods together. So, demand for a given commodity is inversely
affected by change in price of complementary goods.

As a result of the higher income levels, the demand curve shifts to the right, toward ….., People have more
money on average, power of purchasing increase, so they are more likely to buy a house at a given
price, increasing the quantity demanded.

1. A product whose demand rises when income rises, and vice versa, is called a normal good. 
2. A product whose demand falls when income rises, and vice versa, is called an inferior good. As
incomes rise, many people will buy fewer generic-brand groceries and more name-brand
groceries. They are less likely to buy used cars and more likely to buy new cars. They will be less
likely to rent an apartment and more likely to own a home, and so on.
Example. When consumer income is low, people buy terrace house . If the economy
grows and consumer income increases, people buy bungalow instead of terrace house
3. luxury goods increases when a person's wealth or income increases. Typically, the greater
the percentage increase in income, the greater the percentage increase in luxury item
purchases. Luxury goods are expensive, wealthy people are disproportionate consumers of
luxury goods

Other types of demand

 Effective demand: This occurs when a consumers desire to buy a good can be backed
up by his ability to afford it.
 Derived demand: This occurs when a good or factor of production such as labour is
demanded for another reason
 A Giffen good is a good where an increase in price of a basic item leads to an increase
in demand, because very poor people cannot afford any other luxury goods.
 An ostentatious good, is a good where an increase in price leads to an increase in
demand because people believe it is now better.
 Composite demand – A good which is demanded for multiple different uses
 Joint demand – goods bought together e.g. printer and printer ink.

Elasticity of demand
  Measurement of the effect of any changes in the price of good on the quantity demanded
 The sensitivity of different items to price changes can be compared
 Responsiveness of the demand of a good to a change in the price

Elastic demand or supply curves indicate that the quantity demanded or supplied
responds to price changes in a greater than proportional manner. An inelastic
demand or supply curve is one where a given percentage change in price will cause
a smaller percentage change in quantity demanded or supplied.
Formula :- = change in quantity / original quantity
change in price / original price

1. When elasticity values >1, means demand for product is elastic (price elastic); means
demands changes were significant when price changes
 If Volvic water increases in price, there will be a significant fall in demand because
people buy cheaper substitutes (demand is elastic)

2. When elasticity value is < 1, means demand for product is not elastic (price inelastic);
means demand changes not significant when price changes. An inelastic demand or supply curve is
one where a given percentage change in price will cause a smaller percentage change in quantity demanded or
supplied.
 If petrol increases in price, because it is a necessity, there is only a small fall in
demand (we say it is inelastic demand).
Elasticity factor
1. Price level
2. Timeframe of price changes
3. Importance of good in consumer budget
4. Substitute product
5. Income level
Other types of elasticity
1. Supply elasticity
 Changes of quantity supplied and changes in prices
 Responsiveness of producers in the supply
 General rule; higher prices, more supply (+ve)
 Economies of scale

2. Income elasticity
  Changes of quantity demanded and changes in income
 Normal goods/inferior goods/luxury goods

3. Cross-price elasticity (substitute/complementary /not related)

 Changes in quantity demanded of A to changes in price of B
 Complement (-ve elasticity)(printer +ink)
 Substitute (+ve elasticity)(tea coffee/coke pepsi)

Supply – is the quantity of goods that a producer is able and willing to sell.
Quantity Supply refers to the quantity of a good that the producer plans to sell in the market.
. Supply curve- The supply curve is a graphic representation of the correlation between the
cost of a good or service and the quantity supplied for a given period.
Movement along the supply curve

 The supply curve will move upward from left to right, as explained in the law
of supply

 price and quantity supply have a positive relationship

 If price changes, there is a movement along the supply curve, e.g. a higher price
causes a higher amount to be supplied As price increases firms have an incentive to
supply more because they get extra revenue (income) from selling the goods. the
quantity supplied increases (all else being equal).
 When the prices of goods and services decline, the supply of goods and services will
then decrease.

The law of supply will work with the following assumption:

- cost of production remain constant
- number of sellers remain the same
- price of related goods does not change

2017 5) Factors affecting the supply curve

Supply curve can be influenced by a number of factors that are termed as determinants of supply.
Generally, the supply of a product depends on its price and other variables such as the cost of
production.
1. Cost of production (increase , supply decrease)

When the amount payable to factors of production and cost of inputs increases, the cost of production also
increases. This will decreases the profitability at any given selling price for its products. . As a result, a higher cost of
production typically causes a firm to supply a smaller quantity at any given price. For example, the cost of input such
as raw material, equipment, and machines increases, the supply of product would decrease so as to save the
resources and gain more profit. In this case, the producers would either reduce supply quantity of product to
the market or stock the product till the market price is exceeded. Hence it will decrease the supply , the supply
curve shifts to the left.and vise versa.

2. speculation of a price of the product 猜测产品价格会上涨

if there is any speculation of a rise in the price of the product, it is typical that the supply in the present market
would drop in order to gain more profit in the future. That also indicates that if the price is expected to
decrease, the supply in the current marketplace would strongly increase.

4. improvement of Technology

Shifts in the supply curve are usually the result of advances in technology that reduce the cost of production.
Technology advances can improve the production efficiency and therefore cut down the cost spent for
production and labour cost. It raises the profit margin and induces the seller to increase the supply . // IoT, BIM
and machine learning are good examples of the effects of technology on the supply curve which will increase
the productivity and reduce the cost of production and lead to increase the profit of the firm. hence, the
supply will increase.

5. Governments’ policies

Government policies can affect the cost of production and the supply curve through taxes, regulations, and subsidies
which great influence on the supply of a product. The lower the tax, the lower the cost of production, It raises
the profit margin and induces the seller to increase the supply. On the other hand, if the strict regulations are
imposed and the excise duty is added, the product’s supply would fall off. Implies that the different policies of
government, such as fiscal policy and industrial policy, has a greater impact on the supply of a product. For
example, increase in tax on excise duties would decrease the supply of a product. //On the other hand, if the
tax rate is low, then the supply of a product would increase.

7. Transportation condition

The supply chain relies on the efficient management of assets and logistics to get raw materials, parts and
finished products from one place to another. Transport is always a constraint to the supply of products, as the
products are not available on time due to poor transport facilities.

With the lack of transportation management, raw materials could not be delivered to the manufacturer fast
and in good condition. The lack of facilities would also prevent the company from distributing its product to
consumers when there is a burst in demand. This would not only damage the company’s benefit but also
lower the competitiveness of the company towards its competitors.

6. The number of producers in the market and their objectives

  The number of sellers in an industry affects market supply When new businesses enter a market,
supply increases causing downward pressure on price. If the existing businesses decide to move away
from maximising their profits towards seeking a higher share of the market, then total supply available
at each price will increase – the market supply curve will shift outwards.

3. Prices of Other Goods:

Besides that, the price of substitutes and complementary goods could also affect the supply of a product. For
example, If a supplier sees the price of timber increase, he may switch to build steel roof for buildings on and
this will lead to a fall in the supply of timber roof. As a result, the firm shifts its limited resources from
production of the given commodity to production of other goods. Overall, price is a factor that affects a
product’s supply the most.

An increase in the price of one complement good causes an increase in the supply of the other. A decrease in
the price of one complement good causes a decrease in the supply of the other.

8. Natural Conditions:
Implies that climatic conditions directly affect the supply of certain products. For example, the supply of
agricultural products increases when monsoon comes on time. However, the supply of these products
decreases at the time of drought. Some of the crops are climate specific and their growth purely depends on
climatic conditions. For example Kharif crops are well grown at the time of summer, while Rabi crops are
produce well in winter season.

1. A decrease in costs of production. This means business can supply more at each
price.firms have an incentive to supply more because they get extra revenue (income)
from selling the goods. Lower costs could be due to lower wages, lower raw material
costs
2. Number of firms. An increase in the number of producers will cause an increase in
supply.
 3. Investment in capacity. Expansion in the capacity of existing firms, e.g. building a new
factory
4. The profitability of alternative products. If a supplier sees the price of timber
increase, he may switch to build steel roof for buildings on and this will lead to a fall in
the supply of timber roof.
5. Related supply. If there is an increase in the supply of land then there will also be an
increase in the supply of houses.
6. Productivity of workers. If workers become more motivated and work hard, then there
will be significant increase in output and supply.
7. Technological improvements. Improvements in technology, such as computers or
automation, reducing firms costs, increase the productivity.
8. Lower taxes. Lower direct taxes (e.g. import tax) reduce the cost of goods.
9. Government subsidies. Increase in government subsidies will also reduce the cost of
goods, e.g. train subsidies reduce the price of production, increase the profit. there will
be significant increase in output and supply.
10. Objectives of firms. If firms are profit maximisers and collude with other firms, we may
see a fall in supply as they try to maximise profits. However, if they switch to targetting
sales or revenue maximisation, then we will see an increase in supply.
11. weather conditions Climatic conditions are very important for agricultural products

In this case, there is a fall in supply. The supply curve shifts to the left. This causes a higher
price. The supply can shift to the left because

 Fewer firms in the market

 Bad weather (agriculture)
 Higher taxes
 Decline in productivity (workers work less hard.)

Shift to right
1. More firms
2. Improved technology
3. Lower tax
4. Higher government subsidies
5. More firms enter the market
Elasticity
The elasticity of a good provides a measure of how sensitive one variable
is to changes in another variable. Elasticity refers to the degree of
responsiveness or sensitivities in demand or supply in relation to
changes in price.
If a curve is more elastic, then small changes in  price will cause large
changes in quantity consumed.  
• If a curve is less elastic (inelastic), then it will take large changes in price
to effect a change in quantity consumed.  
Graphically, elasticity can be represented by the appearance of the
demand or supply curve.
• A more elastic curve will be horizontal, and
• A less elastic curve will tilt more vertically.
Types of Elasticity
1. Price Elasticity of Demand (PED)
 Shows how sensitive QDis to a change in  Price 
 Depends on how many substitutes for that  good

2. Price Elasticity of Supply (PES)

 Shows how sensitive QSis to a change in  Price 
 o Depends on various production factors.

3. Cross-Price Elasticity of Demand (XED)

 Shows how sensitive QD of one product to  a change in Price of a different
product. 
 o It analyses whether a product is Substitute  or Complement.

4. Income Elasticity of Demand (YED)

 Shows how sensitive QDis to a change in  Income. 
 o It analyses whether a product is Normal  Good, Necessity Good or Inferior
Good
Determinants of PED
Price elasticity of goods and services depend on various factors:
1. The availability of substitutes in the market. The more substitute goods
available in the market, the greater the elasticity. the availability of
substitutes has major impact on the demand for a product. If substitutes
are easily available at relatively low prices, the demand for the product
would be more elastic and vice versa.
For example, if the price of tea rises, people may opt for coffee.
2. Complementary goods. The demand for complementary goods tend to
be inelastic.
3. Nature of goods. Luxury goods are more elastic in demand than
necessity goods.
4. Proportion of expenditure on a good. Cheaper goods have an inelastic
demand.
5. Income levels. People in the higher income group will tend to have
inelastic demand. The amount of income that consumers spend on purchasing a particular
product also influences the price elasticity of demand. If consumers spend a large sum on a product,
the demand for the product would be elastic.

For example, if the price of salt is raised by 50%, the demand would still be inelastic as consumers
would keep on purchasing. Conversely, if the price of a home theatre system is raised by 25%, the
demand for the system would be more elastic.

6. Habits – are the goods addictive? These goods tend to be price

inelastic.
7. Time period. Elasticity tends to increase with time. It majorly influences the
price elasticity of demand. Demand for a product remains inelastic in the short run due to failure to
postpone demand.For example, if the price of electricity goes up, people may find it difficult to cut
its consumption; thus, the demand would remain less elastic. However, in case of a continuous
increase in the price, people would gradually reduce the consumption of electricity by finding
various ways, such as using CFL bulbs. In such a case, the demand would be more elastic
8. Number of uses. Frequently purchased products tend to have inelastic
demand.
9. Importance of goods in consumer goods. if the consumer goods is important
to the consumer like the necessary goods in daily life. the price increase will
change the quantity of supplier. The need of every individual is not the same for the same
product. A product that is luxury for an individual may be a necessity for another person.

For example, a laptop may be a luxury product for an ordinary individual, while a necessity for a
computer engineer. Thus, price elasticity differs across people due to their different needs.

10. Perishability of the product

If products are perishable in nature, the demand for such products would be inelastic as their
consumption cannot be postponed.

For example, if the prices of vegetables that are used regularly are raised, the consumption would
not decrease. Thus, the demand would be inelastic. Similarly, if products such as medicines are to
be used in an emergency, the demand for them would not decrease.
11. Addiction
Some products, such as cigarettes and other tobacco-based products, have inelastic demand.

For instance, smokers may be willing to pay extra for cigarettes even in case of a price rise. Thus,
the demand would remain the same.

- Price level
- Timeframe of price changes
-
 PES > 1: Supply is elastic.
 PES < 1: Supply is inelastic.
 PES = 0: The supply curve is vertical; there is no response of demand to prices.
Supply is “perfectly inelastic.”
 PES = ∞ (i.e., infinity): The supply curve is horizontal; there is extreme change in demand in response to
very small change in prices. Supply is “perfectly elastic.”

Inelastic goods are often described as necessities. A shift in price does not
drastically impact consumer demand or the overall supply of the good because it is
not something people are able or willing to go without. Examples of inelastic goods
would be water, gasoline, housing, and food.
Elastic goods are usually viewed as luxury items. An increase in price for an elastic
good has a noticeable impact on consumption. The good is viewed as something
that individuals are willing to sacrifice in order to save money. An example of an
elastic good is movie tickets, which are viewed as entertainment and not a
necessity.

Determinants of PES

Price elasticity of goods and services depend on various factors:

1. Technology advancements – leads to more production (output) and the supply

tends to be elastic.

2. Time dimensions – in the short term, supply is inelastic, but in the long term,
supply becomes more elastic.

3. Availability a of factors of production – supply tends to be more elastic.

4. Nature of the market – if products can be sold in different market, supply

becomes more elastic.

5. Perishability – products such as agricultural products (e.g. fruits and vegetables),

supply tends to be inelastic compared to less perishable products (e.g. shoes,
clothing, canned food), the supply is more elastic.

1. Number of producers: ease of entry into the market.

2. Spare capacity: it is easy to increase production if there is a shift in demand.
3. Ease of switching: if production of goods can be varied, supply is more elastic.
4. Ease of storage: when goods can be stored easily, the elastic response increases demand.
5. Length of production period: quick production responds to a price increase easier.
6. Time period of training: when a firm invests in capital the supply is more elastic in its
response to price increases.
7. Factor mobility: when moving resources into the industry is easier, the supply curve in
more elastic.
 8. Reaction of costs: if costs rise slowly it will stimulate an increase in quantity supplied. If
cost rise rapidly the stimulus to production will be choked off quickly.

Elasticity factor
1. Price level
2. Timeframe of price changes
3. Importance of good in consumer budget
4. Substitute product
5. Income level
Other types of elasticity

1. Supply elasticity

 Changes of quantity supplied and changes in prices

 Responsiveness of producers in the supply

 General rule; higher prices, more supply (+ve)

 Economies of scale

2. Income elasticity

 Changes of quantity demanded and changes in income

 Normal goods/inferior goods/luxury goods

3. Cross-price elasticity (substitute/complementary /not related)

 Changes in quantity demanded of A to changes in price of B

 Complement (-ve elasticity)(printer +ink)

 Substitute (+ve elasticity)(tea coffee/coke pepsi)