The rules of the modern market are very strict: every manufacturer that for some reason cannot fulfill its requirements is loser. Often this happens due to the fact that businessmen, especially beginners, ignore the fundamental requirements of the economic industry. For example, demand factors.
Law of demand
It is impossible to consider the factors of demand without mentioning the law, which considers its existence and regulation. In the end, understanding the issue depends on it. So, the demand in modern economic science is called the need for goods or services from the population, and people are willing to pay for the required. Accordingly, the amount of demand is the volume of goods or services for which the buyer is willing to pay here and now at the prices currently set. As you might guess, this factor largely depends on the real incomes of consumers. By the way, the price of demand is the maximum amount that the consumer is willing to pay for the goods or service he needs.
In a word, potential consumers always have a certain desire to possess certain types of benefits, for which people are ready to lay out certain amounts of money (price factors of demand). Accordingly, high consumer activity should imply not only the development of this very desire, but also the presence on the market of the necessary quantity of goods and / or services.
Other elements of the law of demand
Domestic manufacturers often forget about one more postulate of demand: if the cost of a commodity is constantly growing at absolutely constant indicators of its quality, consumer activity in its relation will inevitably fall to the lowest possible value. In addition, there are two important effect: substitution and income. What is the essence of these concepts?
As everyone knows, the constant increase in the value of goods with an increase in general inflation inevitably leads to a decrease in real incomes of the population with their formally preserved level. This leads to a significant decrease in demand. (income effect).
At the same time, manufacturers and sellers of replacement samples are experiencing a significant increase in sales, as the population more actively begins to buy cheap substitutes, especially not looking at their quality in the face of a difficult economic situation.
What is the demand?
This concept is divided into several varieties at once:
- Individual, which is formed in each person individually.
- Demand market, the direction of which is set by the market itself.
- Industrial. This variety is better known as the demand for factors of production and determines which goods and raw materials are needed by production enterprises.
- Consumer.
What can influence demand?
It should be remembered that demand factors depend on many external and internal influences, each of which can become decisive. So, demand depends on the following:
- Does the manufacturer use or not use advertising of his products.
- From the formation of tastes and the presence of certain trends in fashion.
- From what exactly the consumer expects to see.
- The presence or absence of some common environmental factors. It is unlikely that winter sales of beach mattresses will increase, and it is foolish to expect a high demand for factors of production with a general drop in output and a decrease in the purchasing power of the population.
- How accessible is the product or service to a wide range of consumers.
- Income values of potential consumers (price factors of demand).
- How useful is the service or product being sold.
- Demand to a large extent depends on how high the price of a similar product or service from competing companies.
- Finally, there is a direct dependence on the size of the population of a country, city, other settlement.
What does he happen to be?
Currently, economists distinguish between exogenous and endogenous demand. The first variety is formed under the influence of some external factors, including the general economic situation in the country or the world, and also depends on the work of the government. Accordingly, such demand is called endogenous, which is formed within society itself under the influence of fashion, public opinion, or similar factors.
The relationship between demand and its value
It is very important to imagine that demand and the magnitude of demand are different concepts that can reflect completely different market problems, “hinting” at future growth or stagnation of production. At the same time, we should not forget that the magnitude of demand very accurately reflects the need for a particular product in a certain time interval. It is this indicator that most quickly responds to a changing economic situation, including that related to the exchange rate, supply, and changing household incomes. But it is important to remember that demand factors can depend not only on the price of a given product for a specific time period, that is, be non-price. Strange as it may seem, even professional economists often forget about this.
Non-price determinants
The determinants of demand are the conditions under which the need for a product with its constant value changes significantly. We will consider the most significant.
The lifestyle and preferences of potential buyers are very important. For example, in recent years there has been an increase in advertising campaigns aimed at promoting a healthy lifestyle. Almost all sports stores recorded a significant increase in consumer activity, provided that prices for the main groups of goods remained unchanged.
Of course, the most important demand factors are consumer income. In most cases, their growth also causes an increase in consumer activity, even if the cost of goods has not changed at all. It is important to note that with significantly increased income, the consumer always prefers to change goods of lower quality to something much better, so that demand in this case may well fall. In principle, it will immediately rise in relation to another product group, so that the essence of the statement remains true.
What other factors are there that influence demand? We have already mentioned, for example, the number of potential consumers. So, in a dying village with a dozen yards, it is difficult to count on high purchasing activity.
Finally, the most important condition is the cost of similar goods or services from competing organizations. Please note that this parameter is indeed non-price, since we are not talking about a real change in value. The price of another product in this case acts as an exogenous factor. Economists say that three groups of “other” goods can simultaneously exist on the market at once, each of which significantly affects consumer demand:
- Neutral group. For example, the ratio of socks and CNC machines. Both groups of goods have no effect on each other.
- Replacing group. These products can have a significant impact on each other. An example is the relationship between incandescent and energy-saving fixtures.
- Complementary goods. For example, fishing line and fishing rods. One is not for sale without the other.
As you can see, the factors affecting demand in relation to the first group are not related to each other, unlike the second case.So, if the price of coffee grows, but the price of tea remains at about the same level, then consumer activity in relation to it will increase, and for coffee beans it will fall. Another canonical example is the situation at the end of the 80s. The sharp increase in the price of oil has stimulated numerous studies in the field of alternative energy. Were it not for that leap, today there would be no demand for electric cars.
Finally, if the cost of complementary goods drops, consumer activity will most likely increase in relation to the main ones. So, in the mid-2000s, the price of computer components dropped significantly, resulting in increased sales of monitors, printers, and other components.
One should never forget that the main factors of demand include consumer expectations. It concerns prices, income levels, people's lifestyle and other nuances. So, while waiting for the devaluation and depreciation of the national currency, the population begins to actively buy all essential goods. This is on the one hand. On the other hand, the same people may assume that the real level of their income will decrease, and therefore they will try to invest in something fundamental, without spending it on other needs.
In all of the above cases, economic factors of demand are functioning properly. But this does not always happen.
When does the law of demand triple its effect?
Firstly, there is the so-called Giffen paradox. With an increase in the price of vital groups of goods, the demand for all other products and services drops sharply. This is especially noticeable during times of severe economic stagnation, and especially during times of famine. The name of this rule comes from the economist Giffen, who in the 19th century explored the relationship between rising potato prices in Ireland and falling demand for other agricultural products.
And everything was explained very simply. The fact is that in Ireland at that time, the main food of the general population was precisely potatoes. As soon as the price went up several times, people whose incomes were already very far from the maximum were forced to greatly reduce their buying activity in relation to other goods and services so as not to simply die of hunger. There are several more cases where the main factors in the formation of demand do not work in a standard way:
- Sales of expensive and high-quality goods are almost always kept at a relatively high level, since the high cost here is considered as an indicator of good quality.
- Veblen effect. An ideal example is the acquisition of Apple products at low incomes. Some mythical status is important to the consumer, the cult of which is regularly supported by the manufacturer.
- Waiting for profitable price dynamics. For example, the cost of peppers at the beginning of the spring-summer season gradually begins to fall, but buyers do not show much activity, expecting its further decline.
- Apartments, jewelry and some other groups of goods, the price of which is very high, are considered by people as a profitable investment, and therefore the demand for them is always at the level.
Laws of Proposal
Market laws are short-sighted to consider, without taking into account the general factors of supply and demand. Labor is not required to analyze purchasing activity, but it is much more difficult to identify the activity of manufacturers and sellers themselves. Simply put, we’ll talk about the proposal now. This is such a general set of goods and services that are on the market at a given moment in time and can be offered by a seller to a potential consumer.
Basic concepts
It is only natural that the factors of supply and demand are very similar. For example, you can easily guess what the value of the proposal is.This is the volume of goods and / or services that the manufacturer is ready to offer the buyer here and now at the price currently set at the particular time. Of course, this figure does not always coincide with customer demand and the capacity of companies.
Offer price
The price of the offer is the minimum price at which the seller can sell a certain part of the product that is currently on the market. Because of this, the volume and structure of supply largely depend on the specific economic situation that has developed in the country and in the world as a whole. In particular, based on this circumstance, a certain volume of goods is formed, which, in principle, can be produced and sent for sale without loss to the enterprise. By the way, the quantity of products that are on the way to the point of sale is called the volume of supply. As a rule, this indicator changes, strongly reacting to the selling price.
If the price is low, then the manufacturer always tries to keep a certain amount of production in warehouses, while at high cost it sends the entire volume to retail and wholesale chains. In the case when it is too high, the quantity of rejects thrown into the market often increases sharply, as enterprises try to get rid of all products altogether, having earned the maximum amount of funds for it. Thus, the factors of supply and demand are largely interconnected.
At what time interval can a proposal be examined?
Economists believe that the proposal can be divided into three time periods:
- Up to a year - it is called short-term.
- Medium-term offer - from a year to five years.
- Accordingly, it can be long-term over a period of more than five years.
To summarize
And now let’s summarize all of the above, having learned what factors of demand for a product can most strongly affect supply:
- Under certain economic conditions, the volume of goods that a seller can release to the markets is always different. Naturally, demand very much depends on this nuance.
- Not always a high offer implies a low cost of production and its high quality.
- Only the demand curve compiled on the basis of all the above data can clearly show how much product is ready to be sold by manufacturers at this particular moment.
Finally, as in the case when we considered the factors of demand change, we should not mix the offer itself and its volume:
- The change in the quantity of goods released to the market occurs under the influence of price factors.
- On the contrary, the proposal itself changes much more often if it is affected by non-price determinants, which we have already discussed above.
What are the non-price determinants relevant in this case?
These include the following factors:
- The presence of promising technical innovations that can significantly reduce production costs, changes in the state tax policy, as well as other internal factors. The external nuances of the market and its conjuncture can no less influence the proposal.
- As in the case when factors of demand for services and products were considered, entry into the market of young firms providing high supply at significantly reduced prices is of great importance.
- In some cases, the release of goods may fall to zero. This happens if the price of raw materials or other components, without which the functioning of the enterprise is impossible, is excessively high.
- Natural disasters.
- Strong political crises, including wars.
- Expectations of economic prospects on the part of both the manufacturer and its potential consumers.
So we looked at an interesting topic on the interaction of supply and demand. We hope you learned something useful from the article!
