Summary
The situation in the industry is considered to be in equilibrium, in which the prices for a product are set at such a level that the volume of wishes of the population corresponds to the number of manufactured products. For example, entrepreneurs are ready to supply the necessary assortment to stores at a set cost. Such a mechanism is regulated by economic legislation. It depends (except for the indicated reasons) on competition and profitability (Pinkasovitch, 2021).
This state of affairs is not constant and can be periodically violated due to the aggressive struggle between enterprises for their share in the niche. The market cannot constantly be in equilibrium. The supply/demand ratio is the balance of price at which the firm’s sales are at their maximum (Fernando, 2021). However, there are non-price metrics that can affect it. For example, a decrease in household incomes due to the crisis can significantly change their ability to purchase goods/services.
Determinants of Supply
Graph 1 demonstrates the supply curve; if it moves to the right, supply increases; if it goes to the left, supply decreases. Below, determinants, the changes in which cause the curve’s shift, are discussed.
The main determinant is the price set by the manufacturer and seller. There are also other components not related to cost. Changing them entails changing the value at a given price tag.
First, it is a technology level. Continuous technological advances are helping to increase the level of return on resources that produce more marketable units. Thus, the introduction of ceiling lines allows an increase in production volumes per worker, which ultimately contributes to an increase in the supply curve. At the same time, the factor is not taken into account in enterprises where manual work or the use of traditional methods is required.
Second, these are prices for resources. The increasing costs of the enterprise, namely the constant increase in prices for resources, forms a directly proportional relationship with the pricing of products, that is, its cost increases. Thus, the item under consideration in conditions of growth has the opposite effect on the value.
Third, these are taxes and subsidiaries. The goods are already taxed on profits, which provides full compensation for the manufacturer. This item has the greatest impact on the supply curve for alcoholic beverages, tobacco and fur factories. The constant rise in price tags for these categories contributes to limiting the number of units produced and purchased.
Fourth, it is the number of manufacturers. The appearance of competitors in a single sphere causes an increase in the number of groups of things in stores, but their appearance soon causes limited resources. The lack of raw materials in the region is forcing entrepreneurs to import them from other places, and therefore to increase the average check.
Fifth, these are prices for the related products. The constant search for more profitable investment capital is explained by the rising prices for similar options. Entrepreneurs strive to invest their funds in the most profitable direction, and at the same time, there is an outflow of capital from other areas, which, accordingly, reduces the volume of supply. This factor is of greater importance for similar production conditions, which guarantees minimal investment in retraining the plant (Jan, 2018).
Determinants of Demand
Graph 2 shows the demand curve. If it moves to the right, demand increases; if it shifts to the left – it decreases. Below, determinants changes that result in this curve’s fluctuations are given.
First, it is consumer income. With an increase in average earnings in a region or country, indexation of wages and other components of profit, there is an increase in demand for products sold. At the same time, entrepreneurs need to take into account that there is a possibility of a change in the structure of consumption, which means that certain categories do not obey a general pattern. Hence, the purchase of low-quality or second-hand goods decreases: with an increase in income, there is no need to purchase them due to the emergence of an opportunity to find a better and more relevant option. In this case, all products are divided into lower, normal and higher categories.
In order to optimize business processes, it is easy to track any changes in work and clearly record the results obtained, using specialized software and equipment. Thus, the N company offers solutions for entrepreneurs in various fields of activity. With the help of our software, you can automate inventory transactions, track the movement of goods and material values, provide information about products to customers, and much more.
Second, these are trends and fashion. The replacement of goods with more relevant ones most often occurs under the influence of advertising, reviews, etc. In this case, with updating, interest in them increases, while for outdated proposals, it decreases. This factor is most pronounced in the field of clothing and footwear, gadgets and accessories, and with regard to durable items, the increase in demand is less pronounced and manifests itself within one year or even several years.
Third, it is the number of consumers. Population change can be natural – an increase in the birth rate/decrease in mortality, as well as artificial – migration. So, in megalopolises, there is a regular and stable increase in the number of permanent residents, which means that demand is growing. In the context of international trade, the introduction of goods into the markets of other countries contributes to an increase in the number of buyers, but the rule only works for universally demanded high-quality substitutes. For example, the sale of national clothes and outfits remains relevant for representatives of certain cultures with the specificity of use in a certain area.
Fourth, these are prices for subsidiary products. Today, everything on the market has substitute products with similar functions. Proposals from a single category share competitive positions (TV companies, car brands, etc.). With an increase in prices, buyers are more likely to turn to a more budgetary analog. The rule applies to products with similar properties or functions. In the case of choosing complex technical or electronic devices, the client additionally studies its unique characteristics and capabilities.
Fifth, these are consumer expectations. Changes in demand also depend on consumer expectations about a possible increase in income or an increase in the price tag in the future. So, when predicting extreme situations, one can observe an increase in interest in essential products, and when expecting a decrease, the buyer postpones a visit to the store until later. This factor is rather difficult for entrepreneurs to predict and, in most cases, is not taken into account when constructing a curve model (Amadeo, 2021).
References
Amadeo, K. (2021). 5 determinants of demand with examples and formula. The Balance. Web.
Fernando, J. (2021). Law of supply and demand. Investopedia. Web.
Jan, I. (2018). Determinants of supply. Xplaind. Web.
Pinkasovitch, A. (2021). Introduction to supply and demand. Investopedia. Web.