Supply and demand are perhaps is the backbone of a market economy. Demand refers to how much (quantity) of a product or service is desired by buyers. The quantity demanded is the amount of a product people are willing to buy at a certain price; the relationship between price and quantity demanded is known as the demand relationship. Supply represents how much the market can offer. The quantity supplied refers to the amount of a certain good producer are willing to supply when receiving a certain price. The correlation between price and how much of a good or service is supplied to the market is known as the supply relationship. Price, therefore, reflects supply and demand.
Factors Determining the Demand of the product:
Individual Factors: The law of demand states that, the higher the price, the lower the quantity demanded. And the pricing of the product on the basis of its demand truly rely upon the following factors:
- Price of commodity: It is inversely proportional to the quantity demanded while other factors are constant. If the price increases, its demand falls and vice-versa.
- Price of related goods: Related goods are classified as either substitutes or complements. Related goods are classified as either substitutes or complements.
- Substitute or Competitive Goods: Substitutes are goods that satisfy a similar needs or desire. An increase in the price of a good will increase demand for its substitute, while a decrease in the price of a good will decrease demand for its substitute.
- Complementary goods: Complements are goods that are used jointly. An increase in the price of a good will decrease demand for its complement while a decrease in the price of a good will increase demand for its complement.
- Consumer Income: If a good is a normal good, increases in income will result in an increase in demand while decreases in income will decrease demand. If a good is an inferior good, increases in income will result in a decrease in demand while decreases in income will increase demand. The demand of the luxury goods increases with the increase in the consumer’s income.
- Taste & Preferences of the Customer: The change in any of these factors results in the change in the consumer’s tastes and preferences, thereby resulting in either increase or decrease in the demand for a product.
- Customer’s Expectation: If the consumer expects a high rise in the price of the commodity, shall purchase it today at a high current price to avoid the pinch of the high price in the future. On the contrary, if the prices are expected to fall in the future the consumer will postpone their purchase with a view to avail benefits of lower prices in the future, especially in case of nonessential goods.
- Credit Policy: Favorable credit policies generally increase the demand for the expensive durable goods such as cars & houses. The consumers with more borrowing capacity consume more than the ones who borrow less.
Market Factors: The Market Demand is defined as the sum of individual demands for a product per unit of time, at a given price. Simply, the total quantity of a commodity demanded by all the buyers/individuals at a given price, other things remaining same is called the market demand.
- Advertisement Expenditure: The effect of advertisement is said to be fruitful if it leads to the upward shift in the demand curve, i.e. the demand increases with the increase in the advertisement expenditure, other things remaining constant.
- Size of the population: For a given level of per capita income, tastes and preferences, price, income, etc., the larger the size of the population the larger the demand for a product and vice-versa.
- Income distribution: The higher the national income, the higher the demand for all the normal goods. If the majority population falls under the low-income groups, then the market demand for the inferior goods will be more than the other category goods.
- Climatic factors: The sales of air conditioners tend to raise more on summer while the sales of umbrella rise in winters.
- Government policy: If a product has high tax rate, this would increase the price of the product. This would result in the decrease in demand for a product. Similarly, the credit policies of a country also induce the demand for a product.
Factors Determining the Supply of the product:
Price of the product: If the price of a product increases, then the supply of the product also increases and vice versa. Change in supply with respect to the change in price is termed as the variation in supply of a product.
Cost of production: The supply of a product would decrease with increase in the cost of production and vice versa. The supply of a product and cost of production are inversely related to each other.
Natural conditions: climatic conditions directly affect the supply of certain products. For example, the supply of agricultural products increases when monsoon comes on time.
Transportation conditions: Transport is always a constraint to the supply of products, as the products are not available on time due to poor transport facilities. Therefore, even if the price of a product increases, the supply would not increase.
Taxation policies: Different policies of government, such as fiscal policy and industrial policy, has a greater impact on the supply of a product
Production techniques: A better and advanced technology increases the production of a product, which results in the increase in the supply of the product.
Factor price of their availability: The inputs, such as raw material man, equipment, and machines, required at the time of production are termed as factors. If the factors are available in sufficient quantity and at lower price, then there would be increase in production.
Industry structure: The operation factor of the firm may be monopolistic in the market. A perfect competitive structure would increase the supply of the product.