Factors That Affect Supply & Demand
Economists study supply and demand to understand various influences that drive our economy. Several factors come in to play, affecting demand and supply in various positive and negative ways. The latest improvements in digital cameras can drive more demand, a price drop in gym memberships can increase demand for exercise gear, or price increases in organic foods might increase supply from vendors, but drops the demand from price-sensitive consumers. Supply and demand work like a seesaw in some ways, always responding to market pressures.
Price fluctuations are a strong factor affecting supply and demand. When a product gets expensive enough that the average consumer no longer feels it is worth it to buy the product, then the demand declines. This leads to cuts in production that will hopefully stabilize the product’s value. Lowering the price of a product may increase demand, indicating that the public feels the product is suddenly a great value. This may also cause changes in production to increase to keep up with the demand.
Changes in income level and credit availability can affect supply and demand in a major way. The housing market is a prime example of this type of impact. During a recession when there are fewer jobs available and there is less money to spend, the price of homes tends to drop. Also, the availability of credit may be less because of the average person’s inability to qualify for a loan. To help encourage those who can afford to buy, prices fall which can boost sales, and even more so if interest rates decrease. When there is an economic boom, unemployment is very low and people are spending money readily, the price of homes and other major purchases tends to rise and so do interest rates.
When an alternative product hits the market, the competition between the existing product and the new one can cause demand to drop for the existing product. Just as many people may be buying the product, a large portion of them may elect to buy the alternative brand. This leads to price wars that ultimately lower the price of the product and may require a cut in supply to fall in line with the decrease in demand.
Demand rises and falls on trends in many cases. Only a few things remain a constant need for society. Even food and shelter aren’t immune to the effects of changing trends. If widespread media attention is given to the idea that eating bean sprouts is bad for you, then eventually it will affect the demand for bean sprouts. When the attention is focused on something else, the bean sprout market might rebound.
Commercials on television, internet and radio have an effect on supply and demand in that they make more people aware of the availability of a product. People do not buy what they don’t know is for sale. If it is an appealing ad, there is a good chance demand will increase and supply will have to follow suit.
The seasons can affect supply and demand drastically. The supply and demand for toys peaks around Christmas and turkeys sell like crazy at Thanksgiving. Fireworks experience a boom at the Fourth of July in America. Meanwhile, it’s difficult to increase demand for bikinis in January in Minnesota.