Causes of decreases and increases in demand

Allocation of Resources – Demand

Learning Objective

Identify and explain the causes of decreases and increases in demand for a good or service, and illustrate these changes with demand diagrams.

1. What is Demand?

• Individual demand: the quantity of a good or service that a single consumer is willing and able to purchase at each possible price during a given period.
• Market demand: the total quantity demanded in a market, obtained by horizontally adding the individual demand curves of all consumers (i.e., market demand = horizontal sum of all individual demands).

2. Drawing a Demand Diagram

1. Vertical axis – Price (P)
2. Horizontal axis – Quantity demanded (Q)
3. Plot a downward‑sloping curve (the law of demand): as price falls, quantity demanded rises.
4. Label the curve D. The point where D meets the supply curve (not shown) is the market equilibrium.

3. Movements Along the Demand Curve

A change in the price of the good itself causes a movement along the existing demand curve. This is a change in quantity demanded, not a change in demand.

• Price ↓ → move down the curve → Quantity demanded increases.
• Price ↑ → move up the curve → Quantity demanded decreases.

4. Shifts of the Demand Curve (Non‑price Factors)

When any factor other than the good’s own price changes, the whole demand curve shifts. A right‑hand shift means an increase in demand; a left‑hand shift means a decrease in demand.

4.1 Factors that Increase Demand (Shift Right)

1. Higher consumer income – for normal goods.
2. Lower consumer income – for inferior goods.
3. Favourable change in tastes & preferences (e.g., a fashion trend, health awareness).
4. Increase in the price of a substitute good (e.g., coffee price rises → tea demand rises).
5. Decrease in the price of a complementary good (e.g., cheaper printers → ink demand rises).
6. Expectations of higher future prices or of a future shortage of the good.
7. Expectations of higher future income for consumers.
8. Increase in the number of potential buyers – population growth, immigration, demographic shifts.
9. Government policy that raises consumers’ disposable income or makes the good more attractive (e.g., a subsidy, tax cut, or deregulation).

4.2 Factors that Decrease Demand (Shift Left)

1. Lower consumer income – for normal goods.
2. Higher consumer income – for inferior goods.
3. Unfavourable change in tastes & preferences (e.g., health scare about a product).
4. Decrease in the price of a substitute good (e.g., cheaper coffee → tea demand falls).
5. Increase in the price of a complementary good (e.g., expensive batteries → digital‑camera demand falls).
6. Expectations of lower future prices or of abundant future supply.
7. Expectations of lower future income for consumers.
8. Decrease in the number of potential buyers – population decline, ageing population, emigration.
9. Government policy that reduces disposable income or makes the good less attractive (e.g., a tax, removal of a subsidy, stricter regulation).

5. Summary Table – Effect of Each Factor

6. Illustrative Example

Smartphones and screen size. A fashion trend makes larger screens desirable. This is a favourable change in tastes, so the demand curve for smartphones shifts right from D₁ to D₂. At the original price, the quantity demanded rises, creating a new equilibrium with a higher price and a higher quantity.

7. Quick Revision Checklist

• Distinguish individual vs. market demand.
• Identify whether the good is normal or inferior.
• Determine if the change described is a price change (movement along the curve → change in quantity demanded) or a non‑price factor (shift of the curve → change in demand).
• For a shift, state the direction (right = increase, left = decrease) and the underlying factor.
• Use the summary table to check your answer.

8. Exam Practice Questions

1. Explain how a rise in the price of coffee (a substitute) would affect the demand for tea, assuming both are normal goods. Include a labelled diagram.
2. Discuss two reasons why the demand for second‑hand cars might fall in the next year. Refer to the relevant demand‑shifting factors.
3. Draw a demand curve for a normal good and show on the same graph:

   • a movement along the curve caused by a price fall, and
   • a right‑hand shift caused by an increase in consumer income.

   Label all axes, curves, and points clearly.