Question

1. Name the five determinants of demand (also called “demand-shifters”).

2. Name the five determinants of supply (also called “supply-shifters”).

Answer 1

1. Demand for a commodity refers to the desire to buy a commodity backed with sufficient purchasing power and the willingness to spend. When demand of a commodity changes due to change in price than it is known as change in quantity demanded and it leads to movement in the demand curve. While when demand of a commodity changes due to change in factors other than price than it is known as change in demand and it leads to shift of demand curve either rightward or leftward. Determinants of demand for a good:

i) Price of related goods: Demand for a commodity is also affected by the change in the price of related goods like substitute goods or complementary goods. Substitute goods are those goods which are used in place of one another. Increase in the price of one good increases the demand of other good and vice-versa. On the other hand, complementary goods are those goods which jointly satisfy a particular want of consumer. An increase in the price of one good decreases the demand of other good. It causes shift of demand curve either rightward or leftwards.

ii) Income of the consumer: Increase in the income of consumer increases the demand of normal good while reduces the demand of inferior goods. It causes shift of demand curve either rightward or leftwards. Increase in the income shifts the demand curve rightwards and vice-versa.

iii) Taste and Preference of the consumer: If consumers have favorable taste and preference for the good then demand of that good increases and vice-versa. If consumers have favourable taste and preference for the good then demand curve shifts rightwards and unfavorable taste for the commodity shifts it leftwards.

iv) Expectation: If people expect that price of a commodity will reduce in near future then people demand less number of goods today and as a result, demand decreases and causes the demand curve to shift leftwards. When people expect that price of a commodity will increase increase in near future than present consumption increases and leads to rightward shift of demand curve.

v) The Price of Commodity: Other things remaining the same, with a rise in the price of the commodity, its demand contracts and with fall in the price, its demand extends. This inverse relationship between the price of a commodity and its demand is called Law of Demand. It causes movement of demand curve either upward or downward.

2.

Supply of a commodity refers to a schedule showing various quantities of a commodity that the producers are willing to sell at different possible prices of the commodity at a point of time. Law of supply states that there is a direct relationship between the price of a commodity and its quantity supplied, keeping other factors constant. Therefore, more is supplied at a higher price and vice-versa.

Determinants of Supply:

Price of related goods: The supply of a good depend on the price of related goods. Example: Consider a firm selling tea. If price of coffee rises in the market, the firm will be willing to sell less tea at an existing price. Or, it will be willing to sell the same quantity only at a higher price. It causes shift of supply curve either rightward or leftwards.

Number of firms: Market supply of a commodity depends upon the number of firms in the market. An increase in the number of firms implies an increase in market supply and vice-versa. It causes shift of supply curve either rightward or leftwards.

Price of factors of production: If the factor price decreases, the cost of production reduces. Due to this more of the commodity is supplied at its existing price. Inversely, increase in factors price increases the cost of production and lead to less supply of commodity. It causes shift of supply curve either rightward or leftwards.

Change in technology: Improvement in the technique of production reduces the cost of production and increases supply and vice-versa. It causes shift of supply curve either rightward or leftwards.

Government policy: Taxation and subsidy policy of the government affects the market supply of the commodity. An increase in taxation tends to reduce supply. On the other hand, subsidies tend to increase in the supply of commodity. It cause shift of supply curve either rightward or leftwards.