Supply and Demand

The law of demand and supply in a market is primarily defined as a function of price. However, there are other determining factors likely to influence the demand or supply in a market. These factors include the following: taste and preference, income, price of complementary or substitute goods, expectation, technology, price of resources, price of related goods, and number of consumers or producers in the market. I’ll illustrate several examples of how these factors affect demand and supply in different markets.

In 2000, American’s love affair with sports-utility vehicle (SUV) exemplified the influence of consumer taste and preference has on the demand for this type of vehicle in automobile market. Automobile consumers wanted larger and roomier vehicles to keep their family safe. Despite safety concerns over SUV’s tendency to rollover, tire treads separation in some SUVs and higher gas prices, an article by Wall Street Journal (Aug. 2000) reported that consumers’ preference for SUV did not fade but showed demand for it to intensify. In this market, the determining factor for SUV demand is the consumer’s taste and preference. Consumers were willing to pay more for a SUV than a sedan because they feel that a larger and heavier vehicle can protect them in an accident. The automakers responded with increased supply as annual sale of SUV surge year over year.

However in 2006, the automobile market for SUV has changed dramatically. With gasoline price more than tripled to $3.00 a gallon, the demand for SUV dropped off significantly. The price of gasoline, a complementary good to an automobile, becomes the influential factor in this market. Consumers are not as willing to purchase these “gas guzzlers” as before. Recently, automakers have scaled back their supply and offered price incentives to counter the slowing demand.

Staying with the automobile industry, in 2000 General Motor decided to eliminate the Oldsmobile line of vehicles due to lack of demand from consumers. GM tried to revive the Oldsmobile brand with new marketing campaign and price incentives but the brand continued to lose market share. The lack of consumers shifted the demand curve to the left. The number vehicle sold indicated the supply curve also shifted to left. The shift of both curves caused GM to cut its financial loses by ending the Oldsmobile brand.

The price of resources and substitute goods can also affect the equilibrium price of a market. In 2005, Wall Street Journal reported the price