Change in Demand

Whenever we go to buy something, we have essentially created a market since a market is wherever buying and selling take place. But have you ever wondered what makes us buy stuff? What makes us want to buy stuff? Even better, what makes us want to buy entirely new stuff we don't usually buy? These questions are answered by studying what causes a change in demand. Sometimes, we may be willing and able to buy one thing, and then something happens that makes us unwilling to buy the same thing. How do we explain this? Read on to find out!

Change in Demand Change in Demand

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Table of contents

    Change in Demand Definition

    To get the definition of a change in demand, let's first understand what demand means. Demand means that buyers are willing and able to purchase goods at certain prices. So, not only must the buyers want the product, but they must also be able to afford it.

    Demand is defined as the desire and ability of consumers to purchase a product at a given price.

    Now that we know what demand means, a change in demand becomes straightforward.

    A change in demand is an increase or decrease in the desire and ability of consumers to purchase a product at a given price.

    As you can see, we mentioned wanting to buy the product and being able to afford it. So, demand entails the quantity of a good and the price at which consumers will buy that quantity. Economists refer to these concepts as quantity demanded and price. While quantity demanded is the quantity of a given product consumers are willing and able to purchase at a given price, price refers to how much money consumers have to pay for that quantity.

    Quantity demanded refers to the quantity of a given product consumers are willing and able to purchase at a given price at a given time.

    Price refers to the amount of money consumers have to pay to acquire a given quantity of a product.

    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.

    The demand curve is a visual representation of the relationship between quantity demanded and price.

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

    Change in Demand Demand Curve StudySmarterFig. 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.

    Change in Demand Increase in Demand StudySmarterFig. 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.

    Change in Demand Decrease in Demand StudySmarterFig. 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.

    Read our article on the Demand Curve to learn more!

    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.

    The determinants of demand refer to the causes of a change in the demand for a given good.

    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.

    Let's say Kent has always bought a pack of cigarettes out of his salary because that is what he can afford. However, Kent gets a raise, and now, since he can afford cigars, he buys cigars instead of cigarettes.

    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.

    The price of tea falls, and since consumers either consume tea or coffee, they stop consuming coffee and consume more tea due to the reduction in the price of tea.

    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.

    Let's assume a pandemic hits the USA, and people receive word of a lockdown. Because of this, they expect a shortage of toilet paper. This expected shortage of toilet paper makes people go out to hoard toilet paper.

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

    Here's another example.

    If civil war erupts in a country that exports microchips to the USA, people will anticipate a shortage since that country's business activities will be disrupted. Therefore, people will hoard microchips, causing an increase in demand.

    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.

    Let's say Kent buys a pack of cigarettes for $5 and is the only buyer for some time. Clark then joins Kent as a consumer of cigarettes for $5 a pack due to an acquired taste for cigarettes.

    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.

    A change in demand for a good refers to a change caused by a change in a determinant of demand, whereas a change in quantity demanded of a good refers to a change caused by a change in the price of the good.

    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.

    The table below shows the demand for bottled water.

    Price ($)Bottles of water (1 consumer)Bottles of water (2 consumers)
    500
    412
    324
    236
    148

    Table 1 - Demand for Bottled Water Example

    Draw the demand curve showing the change in demand from 1 consumer to 2 consumers.

    Figure 4 shows the demand curves for bottled water as the number of consumers increases.

    Change in Demand Change in Demand StudySmarterFig. 4 - Change in Demand

    As shown in Figure 4, the demand for bottles of water increased as a result of the increase in the number of consumers, and this shifted the demand curve to the right from D1 to D2.

    Read our article on Market Equilibrium to learn how the whole market works!

    Change in Demand - Key takeaways

    • A change in demand is an increase or decrease in the desire and ability of consumers to purchase a product at a given price.
    • The demand curve is a visual representation of the relationship between quantity demanded and price.
    • The determinants of demand include income, the prices of related goods, tastes, expectations, and the number of buyers.
    • A change in demand for a good refers to a change caused by a change in a determinant of demand, whereas a change in quantity demanded of a good refers to a change caused by a change in the price of the good.
    • A rightward shift of the demand curve is an increase in demand, whereas a leftward shift is a decrease in demand.
    Frequently Asked Questions about Change in Demand

    What are the factors of change in demand?

    The determinants of demand are the factors that cause a change in the demand of a given good. The main determinants are income, the prices of related goods, tastes, expectations, and the number of buyers.

    What is change in demand and quantity demanded?

    A change in demand for a good refers to a change caused by a change in a determinant of demand, whereas a change in quantity demanded of a good refers to a change caused by a change in the price of the good.

    What are the types of change in demand?

    Demand can either increase or decrease.

    What causes change in demand and supply?

    The determinants of demand and supply cause changes in demand and supply.

    What does change in demand means explain using diagram?

    A change in demand refers to a change in the willingness and ability of consumers to buy a given product, caused by factors besides the price of the product. On a diagram it would cause the demand curve to shift.

    Test your knowledge with multiple choice flashcards

    The price of a good is a determinant of the demand of that good itself.

    The number of buyers is a determinant of demand.

    The quantity demanded is plotted on the vertical axis.

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