Non-Price Factors Affecting Demand & Supply

Introduction

In our last lesson, we made a crucial distinction between a movement along a demand or supply curve (caused only by a change in the good's own price) and a shift of the entire curve. We established that these shifts happen when we relax the ceteris paribus ("all else being equal") assumption and allow a non-price factor to change.

This lesson directly addresses the learning outcome: to identify the key non-price factors that shift demand and supply curves. We will systematically unpack the major "other factors" for both demand and supply. Understanding these shifters is essential for analyzing how real-world events impact market prices and quantities, a core skill for financial analysis.

1. Factors That Shift the Demand Curve

A "change in demand" means that at every price, consumers are willing and able to buy a different quantity of a good. An increase in demand shifts the curve to the right; a decrease shifts it to the left.

The following video provides an excellent and detailed overview of the five primary factors that cause these shifts.

Let's break down these factors one by one. For easy recall, you can sometimes use acronyms like TIPEC (Tastes, Income, Prices of related goods, Expectations, number of Consumers).

A. Income

A change in consumer income can increase or decrease demand, depending on the nature of the good.

• Normal Goods: For most goods, as income rises, demand increases (the curve shifts right). As income falls, demand decreases (shifts left). Examples include restaurant meals, new cars, and vacations.
• Inferior Goods: For some goods, the relationship is inverse. As income rises, demand decreases (shifts left). These are often cheaper alternatives that people replace as they become wealthier. Examples include instant noodles, generic brands, and bus travel.

B. Prices of Related Goods

The price of one good can affect the demand for another.

• Substitutes: These are goods used in place of one another (e.g., Coca-Cola and Pepsi, iPhone and Android phones). If the price of a substitute good increases, demand for the original good will increase (shift right). If you were buying Pepsi, but its price goes up, you're more likely to switch to Coke.
• Complements: These are goods often used together (e.g., cars and gasoline, printers and ink cartridges). If the price of a complementary good increases, demand for the original good will decrease (shift left). If the price of gasoline soars, the demand for less fuel-efficient SUVs may fall.

C. Tastes and Preferences

Changes in consumer tastes, often influenced by trends, advertising, or new information, can shift the demand curve. If a new health study reveals the benefits of a certain food, its demand curve will shift right.

D. Number of Buyers (Population)

An increase in the number of consumers in a market will increase demand (shift right). A decrease will shift it left. For example, demographic changes, like an aging population, will increase the demand for healthcare services.

E. Expectations

Consumers' expectations about the future can change their current demand. If you expect the price of a product to rise next month, you are more likely to buy it now, increasing current demand (a rightward shift).

To solidify these concepts with more examples and see them presented in a textbook format, please read the following sections.

2. A Quantitative View of Demand Shifters

Your mathematical background provides an opportunity to understand these shifts at a deeper level. Recall the general demand function: $Q_{Dx}=f(P_x,I,P_y)$. The demand curve we draw is a simplified 2D relationship between $Q_{Dx}$ and $P_x$, which assumes income ($I$) and the price of related goods ($P_y$) are constant.

When $I$ or $P_y$ changes, the entire function's relationship to $P_x$ is altered, causing a shift. The following reading shows this with a specific equation.

3. Factors That Shift the Supply Curve

Now let's turn to producers. A "change in supply" means that at every price, firms are willing and able to sell a different quantity. An increase in supply shifts the curve to the right; a decrease shifts it to the left.

This very brief video will quickly list the main factors that shift the supply curve.

The main shifters of supply relate to the costs of production and other factors affecting producers' profitability and decisions.

A. Input Prices

A change in the price of inputs (or factors of production) is a primary shifter of supply. If the cost of labor, raw materials, or machinery decreases, production becomes more profitable, and supply increases (shifts right). An increase in input prices decreases supply (shifts left).

B. Technology

Technological advancements that make production more efficient will lower costs and increase supply (shift right).

C. Number of Sellers

If more firms enter a market, the market supply will increase (shift right). If firms exit, supply will decrease (shifts left).

D. Expectations

If producers expect the price of their product to rise significantly in the future, they might reduce the quantity they offer for sale today, choosing to store it to sell later at the higher price. This would decrease current supply (shift left).

E. Government Policies

• Taxes: Taxes on goods (like excise taxes) increase the cost of production, leading to a decrease in supply (shift left).
• Subsidies: Government subsidies effectively lower the cost of production, leading to an increase in supply (shift right).

This next reading from OpenStax provides a more detailed explanation of these supply shifters.

Conclusion

We have now cataloged the key non-price factors that are held constant under the ceteris paribus assumption. When any of these factors change, the result is not a movement along the curve, but a shift of the entire curve.

Key Takeaways:

• Demand Shifters: Changes in consumer Tastes, Income, Prices of related goods (substitutes/complements), Expectations, and the number of Consumers.
• Supply Shifters: Changes in Input prices, Technology, Number of sellers, producer Expectations, and Government policies (taxes/subsidies).
• An increase in demand or supply is a rightward shift.
• A decrease in demand or supply is a leftward shift.

Here is a helpful summary image that puts all of these shifters in one place.

Preview of the Next Lesson:

Now that we understand what causes demand and supply curves to shift, we are ready to combine them. In the next lesson, we will put the demand and supply curves together to find the market equilibrium price and quantity. We will then see how the shifts we learned about today affect that equilibrium.