Key Factors Influencing Market Demand and Supply

Determinants of Individual Demand

• The price of the good (P_i): The relationship between the quantity demanded of an asset and its price is known as the "Law of Demand." Keeping everything else constant (ceteris paribus), the quantity demanded of a good falls when its price rises.
• The consumer's income (R_i):
  • Normal good: The quantity demanded increases as income increases.
  • Inferior good: The quantity demanded decreases as income increases.
• The prices of other related goods (P_k):
  • Substitute goods: An increase in the price of one leads to an increase in the demand for the other.
  • Complementary goods: An increase in the price of one produces a decrease in the quantity demanded of the other.
• Consumer tastes (G_j): These have a major impact on the demand for a good.
• Consumer expectations (E_j): Our expectations about the future can influence our current demand for a good or service.

The Four Determinants of Demand Elasticity

• Necessities versus luxury goods: Goods that we deem necessary often have a small price elasticity relative to the prices at which they are habitually sold, since a change in price causes a small change in demand.
• Availability of substitutes: The more easily replaceable a good is, the more elastic its demand.
• Definition of the good: Goods with a very generic definition tend to have a demand that is rigid. If the definition is precise (e.g., a specific brand of chocolate ice cream), the demand for the good tends to be more flexible.
• The time horizon: Goods tend to have more elastic demand when the time period in which we measure the elasticity is greater.

Determinants of Individual Supply

• The price of the good (P_i): The relationship between the quantity of a good supplied by a company and its price is called the "Law of Supply." Ceteris paribus, the quantity supplied of a commodity by a firm increases as the price increases, since the sale of the good is more profitable for the company.
• The prices of production factors (P_f): The quantity of a good is negatively related to the price of the factors used to produce it.
• Technology (A): A breakthrough in technology positively affects the amount offered; it allows the same output using fewer resources.
• Expectations of businesses (E_j): A company's expectations regarding future market conditions may influence its supply.