# Supply affects demand, but not through the prices

Microeconomic theory describes supply and demand in a free market as two functions that are related only through the price: the produces decide how much to supply given the price, and the consumers decide how much to buy given the price.

But sometimes, the supply directly influences the demand. For example, if the supply of bus-trips decreases (say, from once in 5 minuts to once in an hour), then more commuters will buy a car, since they cannot rely on bus-trips. These commuters will not use bus at all. As a result, the demand for bus-trips will decrease. This effect is unrelated to the price of bus-trips.

Is there a term for such a direct influence of supply on demand?

• I think there is some imprecision in your example, as it is not the supply of a single homogeneous good (bus rides at time X), that changes, but rather the number of imperfect substitutes in the market. From the consumers’ viewpoint this is an issue of quality, not quantity. Quality of service does of course affect demand. Feb 16, 2022 at 1:48

I do not believe there is a special term for it but microeconomic theory does captures such phenomenon.

For example, simple microeconomic problem:

$$\max u(x,y) \text{ s.t. } px+qy =m \tag{1}$$

where $$u$$ is utility function, $$x$$ is one good let's say the bus rides, $$y$$ is another good let's say the car rides, $$p$$ and $$q$$ is price and $$m$$ is an income.

The functions that determine the optimal consumption quantities to the problem given by 1, $$x^*(p,q,m)$$ and $$y^*(p,q,m)$$ are demand function so $$x^*(p,q,m)$$ is demand for bus and $$y^*(p,q,m)$$ for cars.

Now if a supply of busses $$x$$ is arbitrarily limited so that consumer cannot purchase the desired optimal quantity (there is some cap $$\bar{x}) then consumers will reallocate all remaining budget to the consumption of $$y$$ (hence quantity demanded of $$y$$ increases) in the example above assuming we select some standard utility where $$U_y'>0$$. In fact the goods do not even need to be substitutes for budget being reallocated to $$y$$ (although this result would probably not be robust to allowing consumers save unspent budget).

However, to my best knowledge this phenomenon has no special terminology/name.

• In your example, if the cap on the supply of x is below its optimal amount, then consumers will just consume at the cap. But the phoenomenon I had in mind was that, due to the supply cap, the consumers will eventually buy even less than the cap. Since bus trips are so scarce, they cannot rely on them, so they must buy a car, and after that, they do not use the bus at all. Feb 15, 2022 at 21:39
• @ErelSegal-Halevi in that case you can just modify the example above for parameters of U to shift if x falls below some pre defined threshold for example U= ax +by where a >0 if x> x_0 and if x<x_0 a=0, where x_0 is the threshold in any case the answer is still same that this does not have set terminology but can be described by basic micro models
– 1muflon1
Feb 15, 2022 at 21:48

I think what you are looking for could be what is typically discussed as 'positive network consumption externalities'.

Networks exhibit positive consumption and production externalities. A positive consumption externality (or network externality) signifies the fact that the value of a unit of the good increases with the number of units sold. To economists, this fact seems quite counterintuitive, since they all know that, except for potatoes in Irish famines, market demand slopes downwards [Economides, Nicholas. “The Economics of Networks.” International Journal of Industrial Organization, October 1996, 14(6), pp. 673– 99.]

So if you think of supply not as the supply function but as the actual number of units then this would fit your description of 'supply' affecting demand.

For the provision of bus trips, the idea is simply that when there are more users per hour, the frequency will increase resulting in a positive externality due to reduced waiting time and better scheduling [see the 'bottleneck model' for a description of scheduling preference in relation to congestion].

However, it is not only a frequency phenomenon but also a matter more broadly of connectivity. More users support more dense networks. Nevertheless, increasing connectivity can - at least in hub and spokes systems - result in delays (it has been suggested)

We propose a second explanation for high air traffic delays: the network benefits associated with the hub and spoke system. [Network Effects, Congestion Externalities, and Air Traffic Delays: Or Why Not All Delays Are Evil By CHRISTOPHER MAYER AND TODD SINAI]

• I think this is an example of the type of phenomena the OP is looking for, not the phenomenon the OP is looking for. Feb 16, 2022 at 7:39
• @Giskard Well, whatever it is I know that it is what it is. Feb 16, 2022 at 9:56