The Consumer and Producer Theory

The Consumer and Producer Theory

The consumer and producer theory explains all economic transactions. The law of supply states that product quantity increases with a hike in price. However, the law of demand reveals that demand rises with a price drop and falls with a price rise. Plotted on a graph, supply and demand curves are opposite and the intersection between the two curves denotes the equilibrium point where demand, supply and price are such that the business is stable.

Business leaders must understand this scenario in theory and practice. Organisations often arrange senior leadership course for their C-suite officials and other leaders to help them master the ideal business situation.

Business revolves around the theory of how consumers choose to spend their money based on their budget and their preferences. Production houses must have all relevant databases of consumer habits and patterns of purchase to predict timeline-based demand. The variation of demand depends on several factors and those for supply must be considered for planning production.

Factors Affecting the Demand in a Market

There are several factors on which the demand for a commodity by a consumer depends. Some of the factors are mentioned below -


One of the most important factors affecting the demand for a commodity is the price of the commodity. When the price of the commodity rises, the demand for the commodity falls. The relationship between the price and the demand of the commodity is known as price demand. It is an inverse relationship.

Preferences of the buyer 

The demand for a product depends on the tastes and preferences of the buyer as well. The tastes and preferences of the people change from time to time. It depends on the latest trends, the general lifestyle of the people, etc.


The income of the buyer majorly affects the demand for a product. The relationship between the income of the buyer and the demand for a commodity is different for normal goods and inferior goods. 

The commodities for which there is an increase in demand with an increase in income of the consumer are known as normal goods. Clothes, cars, etc are some of the examples of normal goods.

The products for which there is a decrease in demand with the decrease in price of the commodity are known as inferior goods. This is because inferior goods are low-quality goods and when the income of the consumer rises, people shift to better-quality products. After a certain level of income is achieved the people want to improve their quality of living and hence shift to better quality products. Some examples of inferior goods are maize, coarse clothes, etc. 

Credit facilities 

The demand for commodities will increase if the consumers can get loans from the bank. With the help of these credit facilities that are provided by the banks, consumers can purchase more commodities that they would not have purchased otherwise.

For example, the demand for cars in India has increased massively because people get loans from the bank. 

Price of substitute and complementary goods 

Substitute goods are commodities that can be used as substitutes for other goods and they fulfil the same type of need. Coke and Pepsi are substitute goods. When the price of one good rise, the demand for the substitute good increases because the same quantity is being offered at a lower price. It is a direct relationship.

Complementary goods are those commodities that are always consumed together. One of the best examples of complementary goods is cars and petrol. If the price of one good rises, the demand for its complementary goods will decrease. It is an inverse relationship.

The relationship between the demand for one product and the price of its related product is known as cross-demand.

Factors Affecting the Supply in a Market

Some of the factors which affect the supply of a commodity by the producer are stated below - 

Input prices 

The supply of a product depends on the cost of the items that are required to produce a commodity. If the input prices are high, then the price of the commodity will be high which in turn will reduce the profit margin and hence decrease in supply. The quantity supplied will increase when the input prices will fall. 

Taxes and subsidies 

Different kinds of taxes like sales tax, excise duty, etc. when imposed on a commodity increase the price of the product and will therefore lead to a decrease in supply. A decrease in taxes will have the opposite effect. Subsidies that are provided by the Government induce the producer to increase their supply.

Price of the product 

When the price of the product increases, the producer will increase the supply. This is because, with an increase in the price of the commodity, the profit margin of the producer will increase. Hence, there will be an increase in supply.  

Techniques of production 

Advanced techniques of production will decrease the cost of production. This will lead to an increase in profit margin and hence the producers will increase their supply. 

Expectations regarding future prices 

When the producers expect that there will be a rise in the price of the commodity, they will hoard the supply in the present period and offer larger quantities of the commodity to be sold in the future. Whereas, if the suppliers expect a fall in the price of the commodity, they will supply as much quantity as possible in the present period to earn maximum profits. 


Nowadays, corporations choose to train their middle management executives on the nuances of business. IIM course for working professionals are the preferred mode of practical and theoretical training for young executives who are destined to take up future challenges.

For example, Global Senior Leadership Program by Imarticus teaches you how to use business analytics to analyse and deal with supply and demand in the market.

IIM course for working professionals has a detailed curriculum and is specially designed keeping in mind the needs of executives and organisations alike.  

This programme will enable prospective candidates to have massive growth right at the start of their careers. The duration of this senior leadership program is 11 months.

Visit the official website of Imarticus for more course-related details. 

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