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# What are Determinants of Demand?

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❶The cause of a change in quantity demanded, either at the individual or market level, is usually a change in one of the determinants of demand. As a result of a supply curve shift, the price and the quantity move in opposite directions.

## Prices of Resources   Increased demand can be represented on the graph as the curve being shifted to the right. At each price point, a greater quantity is demanded, as from the initial curve D1 to the new curve D2. In the diagram, this raises the equilibrium price from P1 to the higher P2. This raises the equilibrium quantity from Q1 to the higher Q2.

A movements along the curve is described as a "change in the quantity demanded" to distinguish it from a "change in demand," that is, a shift of the curve.

The increase in demand could also come from changing tastes and fashions, incomes, price changes in complementary and substitute goods, market expectations, and number of buyers. This would cause the entire demand curve to shift changing the equilibrium price and quantity. Note in the diagram that the shift of the demand curve, by causing a new equilibrium price to emerge, resulted in movement along the supply curve from the point Q 1 , P 1 to the point Q 2 , P 2.

If the demand decreases , then the opposite happens: If the demand starts at D2 , and decreases to D1 , the equilibrium price will decrease, and the equilibrium quantity will also decrease. The quantity supplied at each price is the same as before the demand shift, reflecting the fact that the supply curve has not shifted; but the equilibrium quantity and price are different as a result of the change shift in demand.

When technological progress occurs, the supply curve shifts. For example, assume that someone invents a better way of growing wheat so that the cost of growing a given quantity of wheat decreases. Otherwise stated, producers will be willing to supply more wheat at every price and this shifts the supply curve S1 outward, to S2 —an increase in supply.

This increase in supply causes the equilibrium price to decrease from P1 to P2. The equilibrium quantity increases from Q1 to Q2 as consumers move along the demand curve to the new lower price. As a result of a supply curve shift, the price and the quantity move in opposite directions. If the quantity supplied decreases , the opposite happens. If the supply curve starts at S2 , and shifts leftward to S1 , the equilibrium price will increase and the equilibrium quantity will decrease as consumers move along the demand curve to the new higher price and associated lower quantity demanded.

The quantity demanded at each price is the same as before the supply shift, reflecting the fact that the demand curve has not shifted. But due to the change shift in supply, the equilibrium quantity and price have changed. The movement of the supply curve in response to a change in a non-price determinant of supply is caused by a change in the y-intercept, the constant term of the supply equation.

The supply curve shifts up and down the y axis as non-price determinants of demand change. Partial equilibrium, as the name suggests, takes into consideration only a part of the market to attain equilibrium. Jain proposes attributed to George Stigler: The supply-and-demand model is a partial equilibrium model of economic equilibrium , where the clearance on the market of some specific goods is obtained independently from prices and quantities in other markets.

In other words, the prices of all substitutes and complements , as well as income levels of consumers are constant. This makes analysis much simpler than in a general equilibrium model which includes an entire economy. Here the dynamic process is that prices adjust until supply equals demand. It is a powerfully simple technique that allows one to study equilibrium , efficiency and comparative statics.

The stringency of the simplifying assumptions inherent in this approach make the model considerably more tractable, but may produce results which, while seemingly precise, do not effectively model real world economic phenomena. Partial equilibrium analysis examines the effects of policy action in creating equilibrium only in that particular sector or market which is directly affected, ignoring its effect in any other market or industry assuming that they being small will have little impact if any.

The model is commonly applied to wages , in the market for labor. The typical roles of supplier and demander are reversed. The suppliers are individuals, who try to sell their labor for the highest price. The demanders of labor are businesses, which try to buy the type of labor they need at the lowest price. The equilibrium price for a certain type of labor is the wage rate. In both classical and Keynesian economics, the money market is analyzed as a supply-and-demand system with interest rates being the price.

The money supply may be a vertical supply curve, if the central bank of a country chooses to use monetary policy to fix its value regardless of the interest rate; in this case the money supply is totally inelastic. On the other hand,  the money supply curve is a horizontal line if the central bank is targeting a fixed interest rate and ignoring the value of the money supply; in this case the money supply curve is perfectly elastic.

The demand for money intersects with the money supply to determine the interest rate. Demand and supply relations in a market can be statistically estimated from price, quantity, and other data with sufficient information in the model. This can be done with simultaneous-equation methods of estimation in econometrics. Such methods allow solving for the model-relevant "structural coefficients," the estimated algebraic counterparts of the theory. The Parameter identification problem is a common issue in "structural estimation.

An alternative to "structural estimation" is reduced-form estimation, which regresses each of the endogenous variables on the respective exogenous variables. Demand and supply have also been generalized to explain macroeconomic variables in a market economy , including the quantity of total output and the general price level.

Thus, each of the determinants of individual demand is also a determinant of market demand. However, aggregating a particular determinant of individual demand across the market through some method such as taking an average does not necessarily capture all the information about that determinant since the distribution across the market also matters.

Broadly, there are three kinds of factors that affect market demand:. Unit price has a direct effect on the quantity demanded but not on the demand curve which is a plot of quantity demanded against individual price.

The relationship is studied by studying the demand curve. The most important feature of this relationship is the law of demand , which asserts that an increase in unit price leads to a decrease in quantity demanded. The cause of a change in quantity demanded, either at the individual or market level, is usually a change in one of the determinants of demand. However, unlike other determinants of supply, the effect of suppliers' expectations on supply is difficult to generalize. For example when farmers suspect the future price of a crop to increase, they will withhold their agricultural produce to benefit from higher price thus reducing the supply.

In case of manufacturers, when they expect the future price to increase, they will employ more resources to increase their output and this may increase current supply as well.

Firms which are able to manufacture related products such as air conditioners and refrigerators will the shift their production to a product the price of which increases substantially related to other related product s thus causing a reduction of supply of the products which were produced before. For example a firm which produces cricket bats is usually able to manufacture hockey sticks as well. When the price of hockey sticks increases, the firm will produce more hockey sticks and less cricket bats.

As a result, the supply of cricket bats will be reduced. When two or more goods are produced in a joint process and the price of any of the product increases, the supply of all the joint products will be increased and vice versa. For example, increase in price of meat will increase the supply of leather. Written by Irfanullah Jan and last modified on Jun 12, ## Main Topics

The demand curve only shows the relationship between the price and quantity. If one of the other determinants changes, the entire demand curve shifts.

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Just as with demand, expectations about the future determinants of supply, meaning future prices, future input costs and future technology, often impact how much of a product a firm is willing to supply .