The necessity factor.
There are many different factors which can cause changes in supply and demand
Economic factors that lead to a new supply curve
- Change in costs of production - increased costs of production will lead to decrease in supply since it will cost more to supply the same amount as before.
- Change in level of technology - better technology can help businesses produce more quickly and at a higher quality with lower costs of production and so there will be an increase in supply.
- Change in price of other goods - if a business is selling more than one type of good, they may decide to switch their resources to selling more of the good that is profitable. By using resources to increase the quantity supplied of the other product, then this can lead to a decrease in supply of the original product.
Non-economic factors that lead to a new supply curve
- Environmental factors - If a business is required to follow stricter environmental controls, this will increase the costs of production and decrease supply.
- Legal factors - Laws requiring firms to follow all rules and regulations will also increase costs of production and lead to decrease in supply.
- Political factors - Such as subsidies and sales tax can affect supply. A subsidy keeps costs of production low, so subsidising products increase supply. Sales tax are placed on products to discourage consumption and this decreases a business's revenue and so supply decreases.
- Trade restrictions - Such as tariffs. A tariff is a tax that is placed on imported goods to increase their price and make them less competitive in the market. An importer of foreign goods will have tariffs placed on their goods which will increase costs of production and so supply decreases.
Factors that lead to a new demand curve
- Income - If consumers have an increase in income, they will usually have an increase in demand for certain goods or services since they can now afford more. i.e. increase in income means increase in demand.
- Tastes and preferences - Fashions come and go and so changes in consumer tastes affect demands. The weather and seasons can also affect demand - there will usually be a decrease in demand for ice-cream in winter.
- Price of substitute goods - Substitute goods can be used in place of another good. So an increase in price for one good will lead to an increase in demand for the other. (Since the other good is now relatively cheaper)
- Price of complementary goods - Complementary goods are used in conjunction with another. So the increase in price of one will lead to a decrease in demand for the other. (since households cannot afford as much as before due to the increase in price)
