DETERMINANTS OF DEMAND DETERMINANTS OF SUPPLY 1.Tastes and Fashions Tastes and fashions change and are also affected by advertising, trends, health considerations etc. 1. Costs of Production a. Change in input prices: wages, raw materials etc. b. Change in technology c. Organisation changes leading to increased/decreased efficiency d. Government policy including taxes and subsidies. 2. The number and price of related goods 2. Profitability of alternative goods in supply. If a farmer makes a greater profit from pineapples than rice, supply of rice will decrease and pineapples increase. Substitutes - the higher the price of substitute goods, the higher the demand will be for this good. If the price of coffee rises then demand for tea will increase. Complements - as the price of complements rises, demand for the complement falls and so too will demand for the good in question. If the price of petrol rises then demand for cars will fall. 3. Income As people’s income rises demand for goods and services rise too. Goods which obey this rule are called - Normal Goods. However the exception to this is an inferior good. Demand for inferior goods will fall as income rises. If margarine is considered an inferior good, as income rises, people will switch to butter. The distribution of incomes will have an effect too. 3. Nature, random shocks Weather, earthquakes, wars, industrial disputes. 4. Expectations of future price changes If people expect prices to rise in the near future they will try to beat the increase by buying early and vice versa. 4. Expectations of future prices If the price of a good is expected to rise the supplier may hoard stock (reducing supply now) in order to benefit later (increase in supply later). 5. Profitability of goods in joint-supply If the supply of beef increases there will be a corresponding increase in supply of leather as one is a by-product of the other. 5. Population The size and make up of the population affect demand. If there is a growing population more food is demanded. If the population is stable but is ageing (like Italy) things that old people need will increase in demand - i.e. health care.