Question

What are some external forces that might impact supply and demand?

Answer 1

External factors affecting demand and supply:

1. Availability of substitutes

If many substitutes are available in the market then the consumers can shift to purchase the alternatives and give up the consumption of the good that they were actually consuming. This will reduce the demand of the product. This will affect the supply in the long-run.

2. Expectations

If the price of a good is expected to rise in future then suppliers will supply more goods and vice versa. Similarly, the demand of the product will rise in the short run because people would be willing to purchase more now than to purchase at a higher price in future.

3. Number of buyers and suppliers

If the number of buyers increase then it will lead to an increased demand and vice versa. Similarly, an increase in the number of sellers will lead to an increase in supply of the good and vice versa.

4. Technology

Technological improvements will create scope of new and innovative products. Due to the entry of innovative products in the market, the demand of the existing products may fall. Similarly, technological improvements can increase the supply of goods and services.