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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 can you answer economic development
Mankaa Reply
how
Fatema
Two things, first economic growth, just takes into account the increase in per capita income... Which is absolutely vague, important, but vague.On the other hand, Economic development, is a much more wider term. Visit my blog to know more about the differences, ***thetheoryofeconomics.blogspot.in
Taha
Problems faced by the trade union
Appiah Reply
Excuse me am new here
ashiru Reply
Hi
Sereena
This app is used for studying and discussions. Hope it wil be useful for you.
Sereena
If u have any questions, please feel free to ask.🙂
Sereena
Hi
Fardin
sereena i have a question.
Fardin
I also have a question
ashiru
can u tel me what are the must major part of economics which helps and is must to know before doing any business?
Fatema
You can say me about question.
Soe
plz suggest me some books of economics & history for pg entrence exam.Only books for crack pg exam!
Wani
i think the most important part is marketing
Fardin
is ny 1 replyin to my question
Fatema
fatema i told your answer
Fardin
thanks Mr fardin.. Dats really nice of u
Fatema
you are welcome. the most important part in marketing for investment and making business is consumer behavior.
Fardin
right
Fatema
explain excess supply
Shalom Reply
surplus .
Kho
an excess supply or economic surplus is a situation in which the quantity of a good or service supplied is more than the quantity demanded, and the price is above the equilibrium level determined by supply and demand
Rahat
what is elasticity of demand
ashiru
how to differentiate long run and short run in monopoly?
shar Reply
Short run is a time period in which at least one factor of production is fixed; long run is when all factors of production are variable
Kevin
what is exceptional supply
Wencelyne Reply
what is the relationship between quantity demanded and price in the function Qd =f(p)
Ahmed Reply
it means qty demand varies inversely with price
mac
well, him in some places I saw it also as price function depending on offer, auctions style
Sorin
it qty demand varies inversely with price
Emmanuel
what is damand curve
Appiah Reply
it is the relationship between the quantity of goods and the price at which that quantity satisfies the demand
Sorin
refers to the graphs that show the relationship between quantity demanded of commodities and that of the price of goods and services at thesame particular time.
Alasana
is like a slope that shows the relationship between quantity that is demanded and also the price of G&S at the very same time
Palesa
Can anyone provide any production function showing returns to scale with MPL
Heron
what is perfect competition market
Bright Reply
what is monopolistic
Bright
There is no diagrams?
Mo Reply
no
Newtan
I want the diagram of shift in demand and supply
Julieth Reply
What is demand elasticity?
Dzuamo Reply
lt is a kind of demand that it existences alwas under every condition.
Abdulraof
what is the demand and supply could you explain please
Chillale Reply
demand is the willness and ability to paid for it whiles supply is when a supplier offered for sale at existing wage rate
Obed
what cause inflation
Dwamena Reply
what are the problems faced by private enterprises.
Gisele Reply
Question one ( 10 marks ) 1) Jenin chemical company wishes to spend $1000 on a combination of two factors labor and capital for producing a given level of output. The price of one unit of labor is $50 per day. Price of capital is $100 per unit , draw the ISOCOST line ?
Qusay
lack of capital for expansion,unlimited liability , low management, lack of resources, it involves high risk in the case of dead.
Alasana
what cause inflation
Dwamena

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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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