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By the end of this section, you will be able to:

  • Identify factors that affect demand
  • Graph demand curves and demand shifts
  • Identify factors that affect supply
  • Graph supply curves and supply shifts

The previous module explored how price    affects the quantity demanded and the quantity supplied. The result was the demand curve and the supply curve. Price, however, is not the only thing that influences demand. Nor is it the only thing that influences supply. For example, how is demand for vegetarian food affected if, say, health concerns cause more consumers to avoid eating meat? Or how is the supply of diamonds affected if diamond producers discover several new diamond mines? What are the major factors, in addition to the price, that influence demand or supply?

Visit this website to read a brief note on how marketing strategies can influence supply and demand of products.

What factors affect demand?

We defined demand as the amount of some product a consumer is willing and able to purchase at each price. That suggests at least two factors in addition to price that affect demand. Willingness to purchase suggests a desire, based on what economists call tastes and preferences. If you neither need nor want something, you will not buy it. Ability to purchase suggests that income is important. Professors are usually able to afford better housing and transportation than students, because they have more income. Prices of related goods can affect demand also. If you need a new car, the price of a Honda may affect your demand for a Ford. Finally, the size or composition of the population can affect demand. The more children a family has, the greater their demand for clothing. The more driving-age children a family has, the greater their demand for car insurance, and the less for diapers and baby formula.

These factors matter both for demand by an individual and demand by the market as a whole. Exactly how do these various factors affect demand, and how do we show the effects graphically? To answer those questions, we need the ceteris paribus assumption.

The Ceteris Paribus Assumption

A demand curve    or a supply curve    is a relationship between two, and only two, variables: quantity on the horizontal axis and price on the vertical axis. The assumption behind a demand curve or a supply curve is that no relevant economic factors, other than the product’s price, are changing. Economists call this assumption ceteris paribus    , a Latin phrase meaning “other things being equal.” Any given demand or supply curve is based on the ceteris paribus assumption that all else is held equal. A demand curve or a supply curve is a relationship between two, and only two, variables when all other variables are kept constant. If all else is not held equal, then the laws of supply and demand will not necessarily hold, as the following Clear It Up feature shows.

When does ceteris paribus Apply?

Ceteris paribus is typically applied when we look at how changes in price affect demand or supply, but ceteris paribus can be applied more generally. In the real world, demand and supply depend on more factors than just price. For example, a consumer’s demand depends on income and a producer’s supply depends on the cost of producing the product. How can we analyze the effect on demand or supply if multiple factors are changing at the same time—say price rises and income falls? The answer is that we examine the changes one at a time, assuming the other factors are held constant.

For example, we can say that an increase in the price reduces the amount consumers will buy (assuming income, and anything else that affects demand, is unchanged). Additionally, a decrease in income reduces the amount consumers can afford to buy (assuming price, and anything else that affects demand, is unchanged). This is what the ceteris paribus assumption really means. In this particular case, after we analyze each factor separately, we can combine the results. The amount consumers buy falls for two reasons: first because of the higher price and second because of the lower income.

Questions & Answers

how do the size of a country's population affect labour force
Evans Reply
a mixed economic system
Ngong Reply
What are the types of price elasticity of demand
Juliana Reply
what are massures to promote geographical mobility of labor?
Ngong
Is to make sure that a labourer to know more about his salary to earn before going to the direction
shehu
what is trade
PHILIPPE Reply
Trade is a basic economic concept involving the buying and selling of goods and services, with compensation paid by a buyer to a seller, or the exchange of goods or services between parties. Trade can take place within an economy between producers and consumers.
Miss
what is fisical policy?
ha Reply
fisical policy or fiscal policy?
Miss
what are.the characteristics of economic goods
Hamis
what are the importance of labour market?
Rachael
how discrib the rural development and their four stages
Sheikh Reply
ye economics se related ha
Sheikh
1..traditional stage..no science and technology is applied hence poor productionuu.2..the take off stage..some development strategies are initiated eg transport system is improved but the traditional cultural belief still remain .3..the prematurely stage..technological methods of production are appl
President
applied leading to higher GDP..4..stage of mass consumption..
President
What is Easiest Formula For National Income?
Tenzin Reply
national income/ agrrigate net value
Sheikh
what do you mean by the supply of goods
sachin Reply
supply of good refer to the total unit of production which is ready to sell at a given price
Tenzin
what is implicit cost
fuseini Reply
Yeah
MOHAMED
any cost that has already occurred but not necessarily shown or reported as a separate expense.
President
The links don't seem to be working
Scorch Reply
what is taxonomy
wise Reply
how to interprets elasticity
Joseph Reply
what is demand curve
Joseph
It is the graphical representation of quantity demand of a commodity?
Kofi
it is the graphical representation of price and quantity demanded of a commodity
Obaa
what is the difference between positive economics and normative economics.
pauline Reply
It said that positive economics studies the facts, but normative one focus on ought to be.
Mohammad
in another words normative economics focuses on what the fair situation is.
Mohammad
positive economics: wages are 10$ per hour. normative economics: wages should be 25$ per hour.
Mohammad
what is choice
Hamis Reply
what is indifference curve
Misba Reply
It is an alternative combination of consumption of two goods which gives equal level of satisfaction.
Shujjat

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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