IGCSE Economics 0455 – Allocation of Resources: Demand
Allocation of Resources – Demand
Objective
Identify and explain the causes of decreases and increases in demand for a good or service.
Key Concepts
Demand: The quantity of a good or service that consumers are willing and able to purchase at various prices during a given period.
Shift of the demand curve: A change in demand is represented by a shift of the entire demand curve to the right (increase) or left (decrease).
Factors that Increase Demand (Shift Right)
Increase in consumer income (for normal goods).
Decrease in consumer income (for inferior goods).
Change in tastes and preferences favouring the good.
Increase in the price of a substitute good.
Decrease in the price of a complementary good.
Expectations of higher future prices or shortages.
Increase in the number of potential buyers (population growth, demographic changes).
Factors that Decrease Demand (Shift Left)
Decrease in consumer income (for normal goods).
Increase in consumer income (for inferior goods).
Change in tastes and preferences away from the good.
Decrease in the price of a substitute good.
Increase in the price of a complementary good.
Expectations of lower future prices or abundant supply.
Decrease in the number of potential buyers (population decline, ageing population).
Table: Summary of Demand‑Shifting Factors
Factor
Effect on Normal Goods
Effect on Inferior Goods
Consumer income ↑
Demand ↑
Demand ↓
Consumer income ↓
Demand ↓
Demand ↑
Price of substitute ↑
Demand ↑
Demand ↑
Price of substitute ↓
Demand ↓
Demand ↓
Price of complement ↓
Demand ↑
Demand ↑
Price of complement ↑
Demand ↓
Demand ↓
Change in tastes favourable
Demand ↑
Demand ↑ (if the good becomes more attractive)
Change in tastes unfavourable
Demand ↓
Demand ↓
Illustrative Example
Consider the market for smartphones. If a new fashion trend makes larger screens desirable, the demand curve shifts right. The new equilibrium can be shown by the equation:
\$\$
Q_d = a - bP + cI + dT
\$\$
where \$Q_d\$ is quantity demanded, \$P\$ is price, \$I\$ is consumer income, and \$T\$ represents the taste factor (positive when preferences favour larger screens).
Suggested diagram: Demand curve shifting right from \$D1\$ to \$D2\$ due to an increase in consumer income for a normal good.
Quick Revision Checklist
Identify whether a good is normal or inferior.
Determine the direction of the shift (right = increase, left = decrease).
Link each factor to the appropriate shift direction.
Use the table to confirm your answer.
Exam Practice Question
Explain how a rise in the price of coffee (a substitute) would affect the demand for tea, assuming both are normal goods. Include a diagram in your answer.