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───▄▀▀▀▄▄▄▄▄▄▄▀▀▀▄─── ───█▒▒░░░░░░░░░▒▒█─── ────█░░█░░░░░█░░█──── ─▄▄──█░░░▀█▀░░░█──▄▄─ █░░█─▀▄░░░░░░░▄▀─█░░█ █▀▀▀▀▀▀▀▀▀▀▀▀▀▀▀▀▀▀▀▀█ █░░╦─╦╔╗╦─╔╗╔╗╔╦╗╔╗░░█ █░░║║║╠─║─║─║║║║║╠─░░█ █░░╚╩╝╚╝╚╝╚╝╚╝╩─╩╚╝░░█ █▄▄▄▄▄▄▄▄▄▄▄▄▄▄▄▄▄▄▄▄█  : Presillyn Tan Jie Yin, Fairview International School . recent update :
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Determinant of Demand and Supply
written by Presillyn Tan ✈
Determinants of Demand
Demand curve shows the
relationship between price and quantity demanded. The determinants of demand
are income, price of other goods, tastes and preferences, expectations about
future prices and incomes, taxes and subsidies.
a) Income
Income is a
key determinant of demand. If the income level for a society rise, the demand
for goods sure will increase. For example, when individuals’ income rises, they
can afford to buy more goods (either normal or luxury) they want, like iPhone. For
inferior goods like public phone, the quantity demanded fall when income rise.
The reason is every person now affords to buy a mobile phone and stop using
public phone when their income increases.
b)
Price
of Other Goods
The
decisions to buy a certain product are based on the price of other goods. In
other words, demand of a product is affected by the prices of other products.
For example, if the price of iPhone rises from RM2, 200 to RM2, 500, but the
price of Samsung Galaxy S3 remains at RM1, 800. The quantity demanded of
Samsung Galaxy S3 will increase because they are substitute goods. For
complementary goods, when the price of a good declines, the demand for its
complement rises. For example, if the price of gasoline decline, the demand of
car rises and vice versa.
c)
Tastes
and Preferences
Tastes and
preferences can affect the demand of a good without a change in price. If
people like a certain brand name or design of a product, they will buy the
products without looking to the price tag. iPhone is a very good example, most
of the people bought iPhone because it is an Apple product and the design of
the phone itself. Although the price of iPhone is relatively high compared to
other smartphones, but the quantity demanded is still very high in most of the
countries.
d)
Expectations
Demand of a
particular good is affected by expectations about future prices and incomes
movement. If people expect the price of iPhone will increase in the future,
they will start buying now before the price increase. Another example is when
people expect their income to rise in the near future, sure they will start
spending some of their income on normal or luxury goods (iPhone, iPad, MacBook
and so on) today.
e)
Taxes
and Subsidies
Taxes are
major income for government. If the government increases the taxes on certain
products, the demand for these goods decline as the goods becomes expensive.
For instance, if Malaysian government increases the taxes on imported products
like iPhone, the quantity demanded for iPhone decline because consumers have to
pay more in order to get an iPhone. Subsidies to consumers have the opposite
effect. When government waives the tax on iPhone, the demand for iPhone will
increase tremendously because it is now cheaper than before.
Determinants of Supply
Supply curve shows the
relationship between price and quantity supplied. The determinants of supply
are price of inputs, technology level, expectations, expectations, taxes and
subsidies.
a)
Price
of Inputs
The main
objective of firms is to engage in productive activities and earn profit. Since
profit is tied to costs of production, thus costs will affect the quantity of
goods a firm is willing to supply. Firm has less incentive to supply more goods
when the cost of inputs rises. For instance, if the costs of materials to build
iPhone increase, Apple Inc. might produce less iPhone and hence reduce the
supply of iPhone in the market.
b)
Technology
Level
Advances in
technology level aid the production process of a product by reducing the
wastage of inputs needed during the production. This in turn reduces the cost
of production, increase the profits and encourage firms to increase the
aggregate supply in economy.
c)
Expectations
Expectations
play an integral role in microeconomics. If suppliers expect that the price of
iPhone will rise at some time in the future, they may store some of the iPhone
today in order to sell it later and reap higher profits.
d)
Taxes
and Subsidies
Taxes
increase the cost of production and will reduce the supply of products in the
market. Because taxes increase the cost of production and reduce the firms’
profit, thus firms are discouraged to produce or supply more products to the
market. The opposite is true for subsidies. Subsidies to firms reduce the cost
of production, increase the firm profit, and thereby encourage the firms to
produce more products in the market.
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