Question

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

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.

Step-by-step solution

Determinants of demand

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.

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.

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).