Determinants are the independent variables that influence and explain changes in demand and supply, separate from price itself.
## Core concept
A determinant is any factor other than price that causes the demand or supply curve to shift. When price changes, we move *along* the curve (a movement). When a determinant changes, the entire curve shifts (a shift). This distinction is critical for CA Foundation exams.
Determinants of Demand (factors shifting demand curve): - Income – Normal goods see demand rise with income; inferior goods see demand fall - Preferences/Tastes – Fashion, health consciousness, brand loyalty - Prices of related goods – Substitutes (pizza vs burger) or complements (petrol vs cars) - Number of buyers – Population growth, target market expansion - Expectations – Future price or income expectations drive current purchases - Government policy – Subsidies, taxes, regulations
Determinants of Supply (factors shifting supply curve): - Input prices – Raw materials, wages, energy costs - Technology – Better machinery reduces production costs, increases supply - Number of sellers – More firms in market increase supply - Expectations – Expected future prices influence current production decisions - Government intervention – Taxes, subsidies, price controls - Natural factors – Weather (agriculture), natural disasters
## Formula / rule
Demand function: Qd = f(P, Y, Pr, T, N, E)
Where: - Qd = Quantity demanded - P = Price of the good - Y = Income - Pr = Price of related goods - T = Tastes - N = Number of buyers - E = Expectations
Supply function: Qs = f(P, Pi, Tech, Ns, E, Gov)
Where Pi = Input prices, Tech = Technology, Ns = Number of sellers, Gov = Government intervention.
## Common exam applications
- Shift vs Movement identification – "If income increases, demand shifts right (not a movement). If price increases, we move up along the same demand curve."
2. Comparative statics – Given a change in one determinant, predict direction of shift and resulting equilibrium change.
3. Real-world scenarios – Example: During COVID, increased home-working demand for laptops (preference shift) + semiconductor shortage (input cost rise) = demand up, supply down → price rises, quantity effect ambiguous.
4. Policy analysis – Subsidy to farmers (input cost falls) shifts supply right; excise tax shifts supply left.
## Common mistakes
- Confusing movement with shift: Price change = movement along curve; determinant change = curve shift.
- Ignoring cross-price effects: Forgetting that a substitute's price rise increases *this* good's demand.
- Supply determinants as demand shifters: Input prices shift supply, not demand.
- Inferior goods logic: Assuming all goods follow normal goods; inferior goods have inverse income effect.
## Worked example
Question: Suppose coffee prices fall. Using determinant analysis, explain the likely effect on tea demand (assuming coffee and tea are substitutes).
Answer: - Coffee price fall is a *movement along coffee's demand curve*, not a determinant change for tea. - However, as coffee becomes cheaper, consumers substitute away from tea *toward* coffee. - Tea's price has not changed, but a determinant (price of substitute coffee) has changed. - Tea's demand curve shifts *left* (demand decreases at every price). - At the original tea price, quantity demanded falls.
Key takeaway: Always isolate whether the change is the good's own price (movement) or an external factor (determinant causing shift).