IGCSE Economics 0455 – The Allocation of Resources: Demand
The Allocation of Resources – Demand
Objective
Understand the causes of extensions (shifts to the right) and contractions (shifts to the left) in the demand curve.
Key Concepts
Demand curve – relationship between price and quantity demanded, ceteris paribus.
Extension of demand – increase in quantity demanded at every price (right‑hand shift).
Contraction of demand – decrease in quantity demanded at every price (left‑hand shift).
Factors that shift the demand curve are distinct from movements along the curve caused by price changes.
Factors that Cause an Extension in Demand
When any of the following factors change, the entire demand curve shifts to the right, indicating a higher quantity demanded at each price.
Increase in consumer income (normal goods) – \$Qd = f(P, Y)\$ where \$Y\$ is income; \$\partial Qd/\partial Y > 0\$.
Change in consumer preferences – positive publicity, trends, or health information that makes a good more desirable.
Increase in the price of a substitute good – consumers switch to the relatively cheaper alternative.
Decrease in the price of a complementary good – lower cost of related goods raises demand for the product.
Increase in population or market size – more potential buyers.
Expectations of higher future prices – consumers buy now to avoid paying more later.
Government policies that boost demand – subsidies, tax reductions, or lower import duties.
Factors that Cause a Contraction in Demand
When any of the following factors change, the demand curve shifts to the left, indicating a lower quantity demanded at each price.
Decrease in consumer income (normal goods) – \$\partial Q_d/\partial Y < 0\$ for inferior goods, but for normal goods the effect is negative.
Unfavourable change in consumer preferences – negative publicity or changing tastes.
Decrease in the price of a substitute good – consumers switch to the cheaper alternative.
Increase in the price of a complementary good – higher cost of related goods reduces demand.
Decrease in population or market size – fewer potential buyers.
Expectations of lower future prices – consumers postpone purchases.
Government policies that reduce demand – taxes, higher import duties, or removal of subsidies.
Summary Table
Factor
Effect on Demand
Direction of Shift
Typical Example
Increase in consumer income (normal goods)
Higher quantity demanded at each price
Right
Rise in wages → more cars bought
Decrease in consumer income (normal goods)
Lower quantity demanded at each price
Left
Recession → fewer restaurant meals
Price rise of a substitute
Consumers switch to the good
Right
Higher price of tea → coffee demand rises
Price fall of a substitute
Consumers switch away
Left
Cheaper smartphones → tablet demand falls
Price fall of a complement
More of the related good is bought
Right
Cheaper printers → demand for ink cartridges rises
Price rise of a complement
Less of the related good is bought
Left
Higher gasoline price → demand for large SU \cdot s falls
Population growth
More buyers overall
Right
Urbanisation → demand for housing increases
Expectations of higher future prices
Current purchases increase
Right
Anticipated tax hike on cigarettes → current sales rise
Expectations of lower future prices
Current purchases decrease
Left
Rumour of a sale → consumers wait
Government subsidy
Effective price falls for consumers
Right
Solar panel subsidy → demand spikes
Government tax increase
Effective price rises for consumers
Left
Excise duty on alcohol → demand falls
Diagrammatic Representation
Suggested diagram: Demand curve shifting right (extension) and left (contraction) with price on the vertical axis and quantity on the horizontal axis.
Exam Practice Question
Question: Explain how a rise in consumer income and a fall in the price of a complementary good would each affect the demand for a normal good. Use appropriate economic terminology.
Answer Outline
Rise in income → demand curve shifts right (extension) because consumers can afford more of the good.
Fall in price of complement → demand curve also shifts right because the combined cost of using both goods falls, making the primary good more attractive.
Both factors lead to a higher equilibrium price and quantity, ceteris paribus.