o

o
o

 The quantity demanded of a commodity by a consumer depends mainly

on price of the commodity itself, prices of other related goods, income of
consumer and tastes and preferences of the consumer.

 The above statement can also be expressed by symbols as:

 DA=F (PA: PB, PC, PD……. I, T)
 ADVERTISEMENTS:

 Where DA shows the consumer’s demand for commodity A; PA stands for

the price of the commodity itself; PB, PC, PD . . . show the prices of other
related goods, 1 denotes consumer’s income and T denotes tastes and
preferences of the consumer; F denotes functional relationship.
o
o
o

5 Major Factors Affecting the

Demand of a Product | Micro
Economics
Some of the major factors affecting the demand in microeconomic:
Demand for a commodity increases or decreases due to a number of factors.

The various factors affecting demand are discussed below:

1. Price of the Given Commodity:
It is the most important factor affecting demand for the given commodity.
Generally, there exists an inverse relationship between price and quantity
demanded. It means, as price increases, quantity demanded falls due to
decrease in the satisfaction level of consumers.
For example, If price of given commodity (say, tea) increases, its quantity
demanded will fall as satisfaction derived from tea will fall due to rise in its
price.

Demand (D) is a function of price (P) and can be expressed as: D = f (P). The
inverse relationship between price and demand, known as ‘Law of Demand’, is
discussed in Section 3.7.

ADVERTISEMENTS:

The following determinants are termed as ‘other factors’ or factors other than
price’.

2. Price of Related Goods:

Demand for the given commodity is also affected by change in prices of the
related goods. Related goods are of two types:

(i) Substitute Goods:

Substitute goods are those goods which can be used in place of one another for
satisfaction of a particular want, like tea and coffee. An increase in the price of
substitute leads to an increase in the demand for given commodity and vice-
versa. For example, if price of a substitute good (say, coffee) increases, then
demand for given commodity (say, tea) will rise as tea will become relatively
cheaper in comparison to coffee. So, demand for a given commodity is directly
affected by change in price of substitute goods.

(ii) Complementary Goods:

Complementary goods are those goods which are used together to satisfy a
particular want, like tea and sugar. An increase in the price of complementary
good leads to a decrease in the demand for given commodity and vice-versa.
For example, if price of a complementary good (say, sugar) increases, then
demand for given commodity (say, tea) will 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.

Examples of Substitute and Complementary Goods:

Substitute Goods
1. Tea and Coffee 2. Coke and Pepsi 3. Pen and Pencil

4. CD and DVD 5. Ink pen and Ball Pen 6. Rice and Wheat

Complementary Goods:
ADVERTISEMENTS:

1. Tea and Sugar 2. Pen and Ink 3. Car and Petrol

4. Bread and Butter 5. Pen and Refill 6. Brick and Cement

For detailed discussion on substitute goods and complementary goods, refer

Section 3.11.

3. Income of the Consumer:

Demand for a commodity is also affected by income of the consumer.
However, the effect of change in income on demand depends on the nature of
the commodity under consideration.

i. If the given commodity is a normal good, then an increase in income leads to

rise in its demand, while a decrease in income reduces the demand.

ii. If the given commodity is an inferior good, then an increase in income

reduces the demand, while a decrease in income leads to rise in demand.

Example:
Suppose, income of a consumer increases. As a result, the consumer reduces
consumption of toned milk and increases consumption of full cream milk. In
this case, ‘Toned Milk’ is an inferior good for the consumer and ‘Full Cream
Milk’ is a normal good. For detailed discussion on normal goods and inferior
goods, refer Section 3.12.

4. Tastes and Preferences:

Tastes and preferences of the consumer directly influence the demand for a
commodity. They include changes in fashion, customs, habits, etc. If a
commodity is in fashion or is preferred by the consumers, then demand for
such a commodity rises. On the other hand, demand for a commodity falls, if
the consumers have no taste for that commodity.

5. Expectation of Change in the Price in Future:

If the price of a certain commodity is expected to increase in near future, then
people will buy more of that commodity than what they normally buy. There
exists a direct relationship between expectation of change in the prices in
future and change in demand in the current period. For example, if the price
of petrol is expected to rise in future, its present demand will increase.

(v) Population:
The change in the population in a country changes the demand. This change in
population is in terms of change in the size and composition of population.
Increase in the size of population will definitely increase the demand of
commodities and services.

Again increase in the size of population also affects the composition of

population. By consumption of population is meant the distribution of
population in terms of the age-group, sex- ratio, and skilled or unskilled
population. In a country where the majority of population is composed of
minors, naturally demand for such goods will be more which interest more to
minor-toys, sports goods, etc.
(vii) State of trade:
During a period of boom—a period in which there is higher circulation of
money and the production level is at a peak, the employment of resources
reaches the optimum level. Consequently there is more purchasing power in
the hands of the people.

The demand for goods and services is also high. But during the depression,
economic conditions are different and opposite to the boom period. The level
of purchasing power is now because of lower level of employment or
resources. So the demand for goods and services is low.

(viii) Climate and weather:

Cold countries have more demand for woolen clothes, heaters, etc. Whereas
the demand in the tropical countries for cotton textiles, umbrellas, rain coats,
etc., is more. Even in the same country demand for umbrellas and rain coats
will not be as high in the winter as during the rains. Thus, change in weather
also influences the demand.

Determinants of Supply:
Supply 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 cost of production. In simple terms, supply is the function of price
and cost of production.

ADVERTISEMENTS:

Some of the factors that influence the supply of a product are

described as follows:
i. Price:
Refers to the main factor that influences the supply of a product to a greater
extent. Unlike demand, there is a direct relationship between the price of a
product and its supply. 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.
Speculation about future price can also affect the supply of a product. If the
price of a product is about to rise in future, the supply of the product would
decrease in the present market because of the profit expected by a seller in
future. However, the fall in the price of a product in future would increase the
supply of product in the present market.

ii. Cost of Production:

Implies that 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. For example, a seller would supply less
quantity of a product in the market, when the cost of production exceeds the
market price of the product.

In such a case the seller would wait for the rise in price in future. The cost of
production rises due to several factors, such as loss of fertility of land, high
wage rates of labor, and increase in the prices of raw material, transport cost,
and tax rate.

iii. 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.

iv. Technology:
Refers to one of the important determinant of supply. A better and advanced
technology increases the production of a product, which results in the increase
in the supply of the product. For example, the production of fertilizers and
good quality seeds increases the production of crops. This further increase the
supply of food grains in the market.

v. Transport Conditions:
Refer to the fact that better transport facilities increase the supply of products.
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.

ADVERTISEMENTS:

In India sellers usually use road transport and the poorly maintained road
makes it difficult to reach the destination on time the products that are
manufactured in one part of the city need to be spread in the whole country
through road transport This may result in the damage of most of the products
during the journey, which can cause heavy loss for a seller. In addition the
seller can also lose his/her customers because of the delay in. the delivery of
products.

vi. Factor Prices and their Availability:

Act as one of the major determinant of supply. 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.

This would increase the supply of a product in the market. For example,
availability of cheap labor and raw material nearby the manufacturing plant of
an organization would help in reducing the labor and transportation costs.
Consequently, the production and supply of the product would increase.

vii. Government’s Policies:

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.

viii. Prices of Related Goods:

Refer to fact that the prices of substitutes and complementary goods also
affect the supply of a product. For example, if the price of wheat increases,
then farmers would tend to grow more wheat than nee. This would decrease
the supply of rice in the market.

1. Price of the given Commodity:

ADVERTISEMENTS:

The most important factor determining the supply of a commodity is its price.
As a general rule, price of a commodity and its supply are directly related. It
means, as price increases, the quantity supplied of the given commodity also
rises and vice-versa. It happens because at higher prices, there are greater
chances of making profit. It induces the firm to offer more for sale in the
market.

Supply (S) is a function of price (P) and can be expressed as: S = f (P). The
direct relationship between price and supply, known as ‘Law of Supply’. The
following determinants are termed as ‘other factors’ or factors other than
price’.

2. Prices of Other Goods:

As resources have alternative uses, 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. For example, increase in the price of other good (say, wheat) will
induce the farmer to use land for cultivation of wheat in place of the given
commodity (say, rice).

3. Prices of Factors of Production (inputs):

ADVERTISEMENTS:

When the amount payable to factors of production and cost of inputs

increases, the cost of production also increases. This decreases the
profitability. As a result, seller reduces the supply of the commodity. On the
other hand, decrease in prices of factors of production or inputs, increases the
supply due to fall in cost of production and subsequent rise in profit margin.

To make ice-cream, firms need various inputs like cream, sugar, machine,
labour, etc. When price of one or more of these inputs rises, producing ice-
creams will become less profitable and firms supply fewer ice-creams.

4. State of Technology:
Technological changes influence the supply of a commodity. Advanced and
improved technology reduces the cost of production, which raises the profit
margin. It induces the seller to increase the supply. However, technological
degradation or complex and out-dated technology will increase the cost of
production and it will lead to decrease in supply.

5. Government Policy (Taxation Policy):

Increase in taxes raises the cost of production and, thus, reduces the supply,
due to lower profit margin. On the other hand, tax concessions and subsidies
increase the supply as they make it more profitable for the firms to supply
goods.

6. Goals / Objectives of the firm:

Generally, supply of a commodity increases only at higher prices as it fulfills
the objective of profit maximization. However, with change in trend, some
firms are willing to supply more even at those prices, which do not maximise
their profits. The objective of such firms is to capture extensive markets and to
enhance their status and prestige.