Factors Affecting Demand and Supply

FACTORS AFFECTING DEMAND AND SUPPLY

by Antonio C. Antonio

November 28, 2013

There are several factors that affect supply and demand considering the relationship between the price of a certain good or service and at what price level consumers are willing to acquire them.  Changes in these factors have a definitive effect on the price of such goods or services.  These factors are:

Factors Affecting Demand:

The Price of the Good or Service – Under normal situations, there is an inverse or conflicting relationship between price and the buying attitude of consumers.  Buyers have a tendency to purchase more products when the price is low while lesser purchases are made when the price are high.  This is often referred to as the Law of Demand.

The Number of Consumers – The increase and decrease of the number of buyers of products consumers are willing to purchase affects demand.  Take the case of National Bookstore where the demand for books and school supplies are high during months when schools are open and sales drastically decline during the summer months.  However, the lean sale during summer is recovered with the surge of buyers at the beginning of the school year.

The Buying Power and Income of Consumers – The buying power of the consumer is largely dependent on his income.  The amount of the product which the consumer is willing and able to purchase would also depend on the type of goods.  There are two types of goods in the market… normal goods and inferior goods.  Normal goods are those which the consumer will buy more of if and when his income increases.  Inferior goods, on the other hand, are not necessarily low in quality but are preferred when income level is low or remain the same.  Example of this is the consumer’s tendency to buy Argentina or CDO corned beef with a low income but will upgrade his choice to Libby’s or Hereford (which are more expensive) when his income and buying power increases.

The Price of Related Goods – Like income, the effect of the price of related goods which the consumer is willing and able to buy largely depends on the type and prices of related goods.  However, there are goods that are purchased together like “diniguan” and “puto.”  Such goods are called complimentary goods.  Even when the price of “puto” increases, the Law of Demand dictates that consumers will not choose to buy lesser of it but will always buy the same number to match how much “dinuguan” they acquire.  Some goods, however, are also considered as substitutes.  When the consumer is no longer willing to purchase a particular good on account of an increase in the good’s price, he will then browse for another good with the same function and necessity.  Bottled mineral water is a good example for substitute goods.  When the price of the Absolute brand increases, consumers will opt to purchase the Wilkins brand.

The Preferences and “Taste” of Consumers – Consumer “taste” is hard to quantify but can still affect demand.  Let’s take the product endorsements of Kris Aquino, Anne Curtis and Nora Aunor as examples.  The buyers for Nora-endorsed products are likely to belong to the “bakya” segment of society, for Anne-endorsed products would be the yuppies and for Kris-endorsed products would be the middle-upper class.

The Expectations of Consumers – “Matibay,” “maaasahan,” and “pang-matagalan” are statements of expectation.  Consumers normally bite into these advertising gimmicks but will refrain from making additional or future purchases if the product end to say otherwise.  Because of this, consumer expectations also affect demand to some degree.

Factors Affecting Supply:

The Price of Inputs – The price of a product is directly affected by the prices of inputs… when the cost to produce a good is low the product could be offered at low SRP and when the price for inputs is high the relative SRP increases.  These inputs are also known as factors of production.  The Law of Supply dictates that when price of inputs are low, more goods could be infused in the market thereby increasing supply.  Similarly, when the prices of inputs are high, production decreases and so will supply.

The Number of Players or Producers in the Market – The entrance and/or exit of producers of players in the market has a direct effect on the number of products that will be produced and supplied in the market.  Competition has a reverse effect on supply…  as competition increases, supply decreases and as competition decreases, supply increases.  The lesser are the players in the market, the more it becomes advantageous to the producers.

The Availability of Production Technology - The application of technology in the production process of a good has an effect on supply.  The use of modern production technology can efficiently produce more good and, therefore, more good could be made available in the market.  Oftentimes, the dilemma of producers is how to recover additional investments in acquiring technology (therefore, machinery, equipment and knowhow).  In most cases, such investments are normally recovered because of production efficiency and cheaper production cost.  More advance countries are engaged in a never-ending research and development of new technologies (machineries, equipment and production methods).

The Expectations of the Producers – Anticipating market trends is also vital in the supply of a product.  Keyboard-type mobile phones are being seriously threatened by touchpad-type models.  I we are in the business of producing component parts for keyboard-type cellular phones, it would be worth looking into getting new out-sourcing contracts for touch-screen type phones… specially if the market has embraced this new technology.  Producers and sellers will certainly adapt to changes in demand.  Supply for both types of mobile phones will eventually increase (touch-screen) and decrease (keyboard).

Just my little thoughts…