Tuesday, 16 December 2014

Supply and Demand and factors affecting supply and demand

Supply and Demand are the two major forces influencing the markets and economical conditions of any country. The whole economy is based on the interactions of these two major factors. They are interrelated to each other closely and changes in one can drastically influence changes in the other.

What is meant by Supply and Demand?
Supply and demand denote the activities of goods or services that are being produced or procured and made available to the market for sale on one hand, and, the requirements or demands placed/ made by potential buyers of those goods and services at the other end. Each demand requires a supply and each supply should get a demand. This chain of supply and demand is a never ending process deciding the market conditions at any particular place or time.

Understanding Supply 
As you already know, supply is the quantity available in market at a particular price that buyers may be willing to pay.

But, normally, any stock of goods in market can be considered as supply irrelevant of their price variations and quality variations. This is because, they are potentially saleable at any time.

Definition of Supply
Economically, supply can be defined as the quantity of any product that a seller offers for sale at a particular price at any particular time or in a given period of time. So, it is not the simple availability of commodities but the willingness of supplier to sell that matters.

Seven major factors influencing supply
Some of the important factors affecting supply are as follows:

  • Price is an important element that influences supply quantum in any market. The producers of goods and services often try to sell their produce at maximum prices and thereby they always try to release more supply when prices are high and low supplies when prices are not attractive. This may sometimes lead to hoarding and black marketeering of goods which shall be discussed later.
  • Cost of inputs is also a major deciding factor in determining the supplies available at any point of time or place. If the cost of inputs in producing the goods are low, they will be produced more and thereby supplies will also increase drastically. Otherwise, when inputs are expensive, production and supply will be lesser.
  • Prices of related goods can also affect supply of a particular good. If the supplier deals in two or more goods and finds out that certain other goods he is dealing with are more profitable, then he may reduce supply of the less profitable item and increase the supply of more profitable items to earn more income.
  • Demand also controls supplies. Excessive demand will automatically require more and more supply. If there is decrease in demand, naturally, the supply of that goods will also be restricted and decreased.
  • Competition in markets influences your supplies. When there are many choices of alternative goods that satisfy a same need, the buyers can shift to less priced goods and your goods will not be demanded. So, you will be forced to decrease your supply.
  • Tastes and likes of consumers or potential buyers can also influence supply of goods and services. If people like a particular product or brand and are willing to pay more to obtain it, then supply of that product requires to be increased in the market to meet their requirements. So, consumers' tastes and preferences will definitely give rise to more supply of those products in market.
  • Technology also plays some role in determining the supply. Use of advanced technology in production methods, facilitates increased production at reduced costs and thereby makes more supply available at reasonable prices.
  • Government interference can also affect supply to a large extent. Government policies may restrict production and supply of certain products by banning those items or imposing heavy duties and taxes.

Demand occurs whenever need is felt for procuring goods or services. Wants create demand and you indulge in satisfying your wants by procuring goods and services.

But, you should note that every want may not necessarily create demand. It depends on some circumstances.

Definition of Demand
Demand can be defined as the quantity of any product that is demanded or purchased by buyers at a particular price in a given period. So, it is the demand backed by purchasing power of the person demanding it. Simple want or desire is not a demand.

 Major factors affecting demand
Some of the important factors influencing demand are discussed below.
  • Abundance of certain varieties of goods and services can stimulate demand for those goods as compared to those in short supply.
  • Price factor controls demand for goods. Cheaper in cost goods attract more demand as compared to highly priced goods and services.
  • Changes in tastes of people can shift the demand from one type of goods to another one.
  • Prices of related goods like substitutes and complementary goods can affect the demand for original goods or services. You can easily shift to cheaper substitutes or quality goods.
  • Advertisement and media can inspire changes in consumer behaviour and thereby shift in demands.
  • Income of Consumers also control their demand for goods as they have to adjust their consumption according to the income.
  • Climate conditions or seasonal changes also affect demand. During summer, people like to wear cotton clothes whereas in winter they need woollen clothes. Demand for rain coats and umbrellas can increase too much.
  • Economic instability of the country can also lead to much variations in demand for goods in fear of price raises or short supplies.
  • Increase in population can also affect demand as there will be more buyers for same quantity of supply.

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