Question

Please describe and define three causes of shifts in supply and three causes of shifts in demand.

Give a specific industry example and how this impacts their business today

Answer 1

Causes of shift in demand-

1. Change in price of substitute goods:

Substitute goods are the goods that can be used in place of each other. For example, tea and coffee, coca-cola and pepsi. If price of a substitute good increases, then the demand of main good will also increase because the customers will prefer cheaper product. And vice- versa. (that is if price of substitute good decreases, then the demand of main good will also fall because the customers will prefer the substitute that costs them lower.)

2. Change in price of complementary goods:

Complementary goods are the goods which are used together. For example, car and fuel or eraser and pencil. If price of complementary good increases, then it will be expensive for the customer to use the two goods together, so the demand of main good will fall.

3. Change in Income:

Change in customer’s income will also affect his demand. If the income increases, he’ll be able to buy more and thus, the demand of a normal good will also increase.

Cause of shift in supply-

1. Change in input prices-

Cost of production includes the input prices that affect the supply of a product. If input prices increases, then the production of a good will become costlier for the supplier and thus he’ll reduce the supply.

2. Technological change-

If there is a technological improvement in the market, then the cost of producing the product will fall and thus the supplier will raise the supply.

3. Government taxes-

These also play an important role in the changes to supply of a product. If government imposes high taxes on producers, then the producers will decrease the supply of their products.

Industry example

Consider the example of a coffee company called ‘Nescafe’. Now if the price of tea increases, then the demand of Nescafe coffee will also increase because the since they are substitutes, the customers will demand more coffee than tea. This is because the price of coffee is now lower than that of tea.

On the supply side of it, If Nescafe introduces new machines to make coffee and coffee beans, then it will cost the industry lower than before. So, they’ll raise the supply of coffee.