There are several different factors that can alter demand, increasing or decreasing it thereby causing the demand curve to shift to the right or to the left. Before I get into that though, there is a very important distinction that I want to make.
The Difference between a Change in Demand and a Change in Quantity Demanded
When talking about demand, there are two terms that get used quite a bit: demand and quantity demanded. These two terms have two very different meanings. When economists talk about quantity demanded, they are referring to one particular price point and one particular quantity, so a single point on the table or the graph. When economists talk about demand, they are referring to the entire table or graph.
If we take a look at any demand equation, table, or graph, we’ll notice that there are two variables: price (P) and quantity demanded (QD). These two variables are what we use to construct our demand model; we take a look at the effect of price on the quantity demanded. We call these variables endogenous variables because they are variables inside of our model. Whenever we alter an endogenous variable, we move along the curve. So a change in price will cause a change in quantity demanded, moving you along the demand curve. So for example, if we change our price from Pa to Pb, we would move along the curve from point a to point b. Correspondingly, the quantity demanded that we’re referring to goes from Qa to Qb.
When we talk about factors outside of our model (things other than price or quantity demanded), we refer to them as exogenous variables. When you change an exogenous variable, instead of moving along the curve from point to point, you move the entire curve itself. A change in an exogenous variable will shift the entire demand curve. We call these variables determinants of demand or shifters of demand because a change in one of these factors will cause consumers to alter the quantity they purchase at every price point. When consumers are purchasing more at every single price point, we say that demand has increased and it is represented graphically by a shift to the right. When consumers are purchasing less at every price point, we say that demand has decreased and it is represented graphically by a shift to the left.
Changes to exogenous variables (variables outside of the model) will shift the whole curve. Moving from D1 to D2 is a decrease in demand. Moving from D1 to D3 is an increase in demand. These movements are referred to as a change in demand.
Determinants of Demand
With that out of the way, let’s take a look at the determinants of demand. There are five basic factors that will change demand; let’s see how they work.
Change in Consumer Tastes
Trends are always coming in and out of fashion so consumer preferences for products change all the time. A change in these preferences will change demand. The more consumers want a product, the more they’ll buy at every possible price, increasing demand and shifting the curve to the right. The less consumers want a product, the less they’ll buy at every possible price, decreasing demand and shifting the curve to the left.
For example, changes in health trends have caused people to buy more healthier, fresh, and organic foods and fewer processed and junk foods. The favorable change in taste for healthy foods increases demand for healthy foods while the unfavorable change for unhealthy food decreases demand for junk foods. [break]
Change in the Number of Buyers
This one is simple; if start buying a good or a service, demand will increase. If fewer people start buying a good or a service, demand will decrease.
Over the past few years owning a smartphone has become the norm, causing more and more people to buy iPhones and Android based phones over feature phones (non-smartphones). The addition of buyers of smartphones increased the demand for smartphones and the reduction of buyers for feature phones decreased the demand for feature phones. [break]
Change in Income
“This one should be easy,” you say. “If I had more money, I would buy more things. So an increase in income increases demand, right? Next.”
Whoa there, not so fast. While it’s true in some cases that an increase in income will lead to an increase in demand, this isn’t always the case.
If you went to work tomorrow and your boss doubled your salary, would you run off to the thrift store to buy more used clothes? Probably not. Are you going to eat more instant noodles and McDonald’s now that you’re making more money? Again, probably not. What about refurbished electronics like laptops and phones? You’d likely opt for new ones instead. What I’m trying to get at here is that an increase in income doesn’t always mean an increase in demand for a product; it depends on what type of good it is. When an increase in income leads to a decrease in demand, that good is referred to as an inferior good. When an increase in income leads to an increase in demand, that good is referred to as a normal good. Normal goods and services things you would typically buy more of when you make more money, like used cars, more cable channels, high quality steaks, etc.
Note: The term normal/inferior doesn’t refer to the quality of the product, it only refers to the correlation between the change in income and change in demand. There are plenty of inferior goods out there that may be better in quality than their normal counterparts, but are referred to as inferior goods in economics anyway just because of the correlation between income and demand. [break]
Change in Prices of Related Goods
Similar to a change in income, a change in the prices of related goods could increase or decrease the demand for a product, depending on what type of good we’re looking at. If two goods are unrelated, then they’ll have little to no effect on each other. [break]
Substitute goods are goods that are similar enough in quality and function that one could be used to replace the other. Examples of substitute goods could be Coke and Pepsi, beef and chicken, Hondas and Toyotas. When the price for a good increases, then the demand for the substitute good will increase. The opposite is also true; when the price for a good decreases, then the demand for the substitute good will decrease. So if the price for Nike running shoes goes up, people will buy fewer Nikes and increase their demand for Reeboks. Similarly, if the price for Nike running shoes go down, people will decrease their demand for Reeboks and buy more Nikes. [break]
Complementary goods are goods that are typically bought and consumed together. An increase in the price of a good will decrease the demand for any complementary goods. Similarly, a decrease in the price of a good will increase the demand for any complementary goods. This is because changing the price of one good changes up the total cost of ownership for the products combined. Examples of complementary goods are hot dogs and hot dog buns, coffee and cream, and video games and video game consoles. [break]
Change in Consumer Expectations
What we as consumers expect to happen in the future will also have an effect on the demand for a good or service. If we expect the price of something to rise in the future, we are more inclined to go and get that product now rather than wait for the price to go up, thereby increasing the demand now. Similarly, if we expect the price of something to fall in the future, we’re more inclined to wait and get the product later, thereby decreasing the demand now. Keep in mind that it isn’t prices themselves that affect demand, it’s our expectations of changing prices that affect demand; the prices may or may not move at all.
Not only do our expectations of changes in prices have an effect on demand, changes in our expected income will an effect as well. If we think our incomes are going to change in the future, then we’ll be more likely to change our spending habits now. Someone who believes a pay raise is coming his way might increase his demand for normal goods and decrease his demand for inferior goods before his income has actually changed. Someone who thinks he’ll be laid off soon might start decreasing his demand normal goods in anticipation of a decrease in income.
-A change in demand is different from a change in quantity demanded. A change in demand shifts the entire curve whereas a change in quantity demanded moves along the curve.
-A positive change in consumer tastes increases demand; a negative change in consumer tastes decreases demand.
-An increase in the number of buyers increases demand; a decrease in the number of buyers decreases demand.
-An increase in income increases demand if it’s a normal good and decreases demand if it’s an inferior good; a decrease in income decreases demand if it’s a normal good and increases demand if it’s an inferior good.
-An increase in price of a good will increase the demand for substitute goods; a decrease in price of a good will decrease the demand for substitute goods.
-An increase in price of a good will decrease the demand for complementary goods; a decrease in price of a good will increase the demand for complementary goods.
-If consumers expect the price increase in the future, their demand will increase; if consumers expect the price decrease in the future, their demand will decrease. If consumers expect their incomes to rise in the future, their demand for normal goods will increase (decrease for inferior goods); if consumers expect their incomes to fall in the future, their demand for normal goods will decrease (increase for inferior goods).
McConnell, Campbell R., Stanley L. Brue, and Sean Masaki. Flynn. Macroeconomics: Principles, Problems, and Policies. Boston: McGraw-Hill Irwin, 2009. Print.
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