Question

In the financial market, what causes a movement along the demand curve? What causes a shift in the demand curve?

Short answer

A movement along the demand curve in the financial market occurs when the price of a financial asset changes, leading to a change in the quantity demanded by investors. In contrast, a shift in the demand curve results from changes in non-price determinants of demand such as consumer preferences, income, expectations, or the prices of related financial assets. Movements along the curve are represented by changes in the quantity demanded as the price increases or decreases, while shifts in the curve represent changes in demand due to external factors, resulting in either an increase or decrease in demand at every price level.

Step-by-step solution

1. Movement along the demand curve

A movement along the demand curve in the financial market happens when there is a change in the price of the financial asset, leading to a change in the quantity demanded by investors. This movement can be described by two scenarios: a) If the price of the financial asset decreases, the quantity demanded at that price level will increase as investors will likely buy more of the asset due to its lower cost. This is represented by moving down and to the right along the demand curve. b) If the price of the financial asset increases, the quantity demanded at that price level will decrease as investors will likely buy fewer of the assets due to their higher cost. This is represented by moving up and to the left along the demand curve.

2. Shift in the demand curve

A shift in the demand curve in the financial market occurs when there is a change in any non-price determinant of demand. This can cause an increase or decrease in the quantity demanded at every price level. Some common factors causing a shift in the demand curve are: a) Changes in consumer preferences: If investors develop a preference for a certain financial asset, this can lead to an outward shift in the demand curve as investors will be willing to buy more of the asset at every price level. b) Changes in income: If investors' income increases, they may have a greater willingness to invest in financial assets, leading to an outward shift in the demand curve. Conversely, a decrease in income may lead to an inward shift in the demand curve as investors have less money available to invest. c) Changes in expectations: If investors expect the price of a financial asset to increase in the future, they may be more willing to buy it at the current price, leading to an outward shift in the demand curve. Conversely, if they expect the price to decrease in the future, this can lead to an inward shift in the demand curve. d) Changes in the prices of related financial assets: If the price of a related financial asset (like a substitute or a complement) changes, it can cause a shift in the demand curve. For example, if the price of a substitute asset decreases, the demand curve for the original asset may shift inwards as investors may prefer to buy the cheaper substitute. Conversely, if the price of a complement asset decreases, the demand curve for the original asset may shift outwards as investors may be more likely to invest in both assets together. These factors can result in either an inward shift (decrease in demand) or an outward shift (increase in demand) of the demand curve in the financial market.