What are the determinants of demand? What happens to the demand curve when any of these determinants change? Distinguish between a change in demand and a movement along a fixed demand curve, noting the cause(s) of each.
Short Answer
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The Determinants of demand are the number of buyers in a given market, consumers’ expectations, the income of a consumer, taste, and preferences, and the price of related goods.
Any change in these determinants (keeping price constant) shifts the demand curve backward or forward.
The change in demand is caused when the price is constant, but the determinants of demand are changing. These factors can shift the demand curve.
A movement along a demand curve occurs when only the concerned good’s price changes and other determinants are constant.
The demand shifters are the determinants of demand that cause backward or forward shifts in the demand curve. These determinants are as follows:
Consumer expectations: An expectation of a higher price for good A in the future increases the present demand for the good. It Implies a forward shift in the demand curve. Similarly, a lower future price expectation will result in a backward shift in the demand curve.
Consumer’s income: The effect of income on demand for a good depends on whether the good is normal or inferior. A higher income encourages more consumption and greater demand for normal goods (a forward shift in the demand curve) and reduced demand for inferior goods (a backward shift in the demand curve) and vice versa.
Price of related goods: A higher price of a substitute good increases the demand (forward shift) while a higher price of a complement good decreases the demand (backward shift).
Taste and preferences: If a consumer develops a taste of a certain type of good, the demand for that good will increase. This implies a forward shift in the demand curve. And if the consumer taste changes in favor of other goods, the demand curve will shift backward.
02
Changes in the demand curve with the changes in the determinants
The demand curve for a good will shift forward if the consumer’s income increases, taste and preferences turn in favor of the good, the price of a complement good decreases or the price of a substitute good increases, and the consumer expects a future increase in prices.
The demand curve for a good will shift backward if the consumer’s income decreases, taste and preferences turn in favor of other goods, the price of a complement good increases or the price of a substitute good decreases, and the consumer expects a future decrease in prices.
03
Difference between change in demand and movement along the demand curve
The change in demand is caused by the change in factors other than the price of the good, that is, the demand shifters.It is shown by a forward and backward shift in the demand curve.
For example, an increase in the population of buyers will shift the demand curve for milk forward. On the contrary, a decrease in the price of tea will shift the demand curve for coffee to the left.
The change in quantity demanded is caused by a change in the price of the good, which results in an upward (contraction in quantity demanded) and downward movement (expansion in quantity demanded) along the demand curve.
For example, an increase in the price of chips will lead to an upward movement along the demand curve of chips (contraction). On the other hand, a decrease in the price of ice creams will lead to a downward movement along the demand curve of ice cream (expansion).
Most popular questions from this chapter
Label each of the following scenarios with the set of symbols that best indicates the price change and quantity change that occur in the scenario. In some scenarios, it may not be possible from the information given to determine the direction of a particular price change or a particular quantity change. We will symbolize those cases as, respectively, “P?” and “Q?” The four possible combinations of price and quantity changes are:A. P↓ Q? P? Q↓B. P↑Q? P? Q↑c. On a hot day, both the demand for lemonade and the supply of lemonade increase.d. On a cold day, both the demand for ice cream and the supply of ice cream decrease.e. When Hawaii’s Mt. Kilauea erupts violently, tourists’ demand for sightseeing flights increases, but the supply of pilots willing to provide these dangerous flights decreases.f. In a hot area of Arizona where a lot of electricity is generated with wind turbines, the demand for electricity falls on windy days as people switch off their air conditioners and enjoy the breeze. But at the same time, the amount of electricity supplied increases as the wind turbines spin faster.Suppose that the demand and supply schedules for rental apartments in the city of Gotham are as given in the following table.a. What is the market equilibrium rental price per month and the market equilibrium number of apartments demanded and supplied?b. If the local government can enforce a rent-control law that sets the maximum monthly rent at \(1,500, will there be a surplus or a shortage? Of how many units? How many units will actually be rented each month?c. Suppose that a new government is elected that wants to keep out the poor. It declares that the minimum rent that landlords can charge is \)2,500 per month. If the government can enforce that price floor, will there be a surplus or a shortage? Of how many units? And how many units will actually be rented each month?d. Suppose that the government wishes to decrease the market equilibrium monthly rent by increasing the supply of housing. Assuming that demand remains unchanged, how many additional units of housing would the government need to supply to get the market equilibrium rental price to fall to \(1,500 per month? To \)1,000 per month?To \(500 per month?Monthly Rent (\))Apartments DemandedApartment Supplied2,50010,00015,0002,00012,50012,5001,50015,00010,0001,00017,5007,50050020,0005,000What effect will each of the following have on the demand for small cars such as the Mini Cooper and Fiat 500?a. Small cars become more fashionable.b. The price of large cars rises (with the price of small cars remaining the same).c. Income declines and small cars are an inferior good.d. Consumers anticipate that the price of small cars will decrease substantially in the near future.e. The price of gasoline substantially drops.Suppose there are three buyers of candy in a market: Tex, Dex, and Rex. The market demand and the individual demands of Tex, Dex, and Rex are shown in the following table.a. Fill in the missing values.b. Which buyer demands the least at a price of \(5? The most at a price of \)7?c. Which buyer’s quantity demanded increases the most when the price decreases from \(7 to \)6?d. In which direction would the market demand curve shift if Tex withdrew from the market? What would happen if Dex doubled his purchases at each possible price?e. Suppose that at a price of \(6, the total quantity demanded increases from 19 to 38. Is this a “change in the quantity demanded” or a “change in demand?” Explain.Individual Quantities DemandedPrice Per CandyTexDexRexTotal Quantity Demanded\)83+1+0=-\(78+2+-=12\)6-+3+4=19\(517+-+6=27\)423+5+8=-In 2001, an outbreak of hoof-and-mouth disease in Europe led to the burning of millions of cattle carcasses. What impact would you expect on the supply of cattle hides, hide prices, the supply of leather goods, and the price of leather goods? Explain.
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