Shifts in demand

A change in the position of a demand curve indicates a change in the 'underlying determinants' of demand rather than a change in price.

A demand curve can shift to the right (at D1) - an increase - or to the left (at D2) - a decrease following a change in an underlying determinant of demand. With an increase, more goods are demanded at all prices.

Increase in demand

Shifts in demand
Shifts in demand

Decrease in demand

Shifts in demand
Shifts in demand

Several factors can cause a shift in a demand curve, including:

  1. Changes in income - which can affect consumer demand in two fundamental ways. In the case of normal goods, income and demand are positively related - an increase in income increases demand, and a reduction in income reduces demand. However, in the case of inferior goods, the relationship between income and demand is inverse - an increase in income reduces demand and a reduction in income increases demand. For example, as income rises individuals are likely to consume more 'luxury' (normal) goods and less basic (inferior) necessities.
  2. Changes in the price of substitutes will also affect demand, with a fall in the price of a substitute leading to a shift of demand to the left, and a rise in the price of a substitute causing demand to shift to the right.
  3. Changes in the price of related products, such as complements, will also shift the demand curve. For example, a rise in the price air travel may lead to a fall in the demand for overseas holidays.
  4. Changes in consumer's tastes and preferences will also affect demand. The demand for gym memberships has increased as more people to improve their levels of health.
  5. Changes in consumer expectations about the probability of an event, or regarding the need to purchase a good or service at some point in the future. For example, having heard that the price of a product is likely to increase in the future a consumer might alter there current consumption and make the purchase 'today' rather than wait. Consumers may speculate about price changes in the future and alter there current consumption. This is especially true in terms of the demand for financial securities, and exchange rates.
  6. Demand can also be influence by changes in the nature of the population - such as when a population ages - and changes in natural factors, such as changes in weather causing changes in the type of clothing demanded.

Consumer surplus

What is consumer surplus?

Consumer surplus
Equilibrium

How is equilibrium determined?

Equilibrium
Welfare

How does equilibrium create welfare?

Welfare

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