Change in Demand

Change in Demand Curve

Economists represent demand with the demand curve, and a change in the demand curve means demand has either increased or decreased. So, what is the demand curve? The demand curve depicts demand graphically. It is derived by drawing a graph and plotting price on the vertical axis and demand on the horizontal axis.

Let's have a look at a simple demand curve in Figure 1.

Fig. 1 - Demand Curve

A change in the demand curve means that demand has either increased or decreased. When the demand curve changes, it shifts, so a change in the demand curve can also be called a shift in the demand curve. The demand curve changes when the determinants of demand cause a change in the quantity demanded. A rightward shift is an increase in demand, whereas a leftward shift is a decrease in demand. Figure 2 shows an increase in demand, whereas Figure 3 shows a decrease in demand.

Fig. 2 - Increase in Demand

As shown in Figure 2, the demand curve shifts to the right from D1 to D2. This is an increase in demand.

Fig. 3 - Decrease in Demand

Figure 3 shows a decrease in demand. This can be seen by the movement of the demand curve from D1 to D2.

Determinants of a Change in Demand

The determinants of a change in demand are the factors that cause the demand curve to shift. They are factors other than the price of the good itself that cause the demand for the good to change.

These determinants of demand include income, the prices of related goods, tastes, expectations, and the number of buyers.

As the quantity of goods consumers are willing to buy depends on the price of the goods, we can mathematically express quantity demanded as a function of price:

\(Q_D=Q_D(P)\)

Where Q _D represents quantity demanded and P represents price. The mathematical expression simply means that Q _D changes depending on the value of P.

Let's explain how each of the determinants of demand can cause a change in demand, and how they factor into the above equation.

Income as a determinant of a change in demand

Income is a determinant of demand because when people earn more money, they tend to be willing and able to purchase more goods. The opposite happens when people earn less money. Note that we are not only talking about quantity demanded here but rather, demand as a whole.

In this case, the quantity demanded is expressed as a function of price and income (I). Mathematically, this is:

\(Q_D=Q_D(P, I)\)

Let's explain it with an example.

The above example reveals that the income increase resulted in an increase in demand for cigars. In this example, cigars are a normal good because the demand for cigars increased when income increased.

• The demand for a normal good increases when there is an income increase.

In the same example, cigarettes are an inferior good because the demand for cigarettes changed in the opposite direction of the change in income.

• The demand for an inferior good decreases with a reduction in income.

Prices of related goods as a determinant of a change in demand

Let's explain how the price of a related good is a determinant of demand using the following example.

In the above example, the law of demand is being followed. As price decreases, demand increases. You should also note that tea and coffee, as described in the example, are substitute goods. Substitute goods are goods that are consumed in place of each other.

Also, let's say people usually have a cookie when they have a chocolate drink. In this case, if the price of a cookie decreases, consumers are likely to buy more of the chocolate drink, increasing its demand. This means that the quantity demanded of the chocolate drink (Q _D) is a function of its price (P) and the price of cookies (P _C). Mathematically, we can express it as:

\(Q_D=Q_D(P, P_C)\)

Tastes as a determinant of a change in demand

Taste is one of the simplest determinants of demand. We buy the products we like because that is what we prefer. Therefore, if we develop a taste for steak, we are likely to buy more steak now, increasing the demand for steak. The reason why people have specific tastes is beyond the scope of economics. As economists, we are concerned with what happens when people develop a taste for a given good.

Here, the quantity demanded becomes a function of price and taste (T). It is expressed as:

\(Q_D=Q_D(P, T)\)

Expectations as a determinant of a change in demand

Expectations can make consumers change their consumption behavior. Let's explain this with an example.

In this example, the expectation of a shortage caused a spike in demand for toilet paper.

Here's another example.

As expectations cause the quantity demanded to change without changing the price, the quantity demanded can be expressed as a function of price and expectations (E):

\(Q_D=Q_D(P, E)\)

Number of buyers as a determinant of a change in demand

The number of buyers influences demand by increasing the quantity of demand at a given price. Let's use an example.

From the above example, the quantity of cigarettes being purchased is 2 packs at the price of $5. This means that the demand has increased since there is an extra buyer now.

We can then add the number of buyers (N) to the equation of quantity demanded as:

\(Q_D=Q_D(P, N)\)

Change in Demand vs Change in Quantity Demanded

What is a change in demand vs a change in quantity demanded? This difference lies in the cause of the change. When economists mention a change in quantity demanded, they are simply referring to an increase or decrease in quantity demanded, which happens when price changes. On the other hand, a change in demand is only caused by the determinants of demand.

Real-World Examples of Change in Demand

Below is a real-world example of a change in demand using an everyday product like bottled water.