Factors that cause shift in demand curve - Essay Example

Factors that cause shift in demand curve The demand curve may shift either ways depending on several factors such as the price of the goods, income of the consumer and availability of substitutes etc. However, the shift can be of two types i.e. movement along the demand curve and the movement of the demand curve. Difference b/w Movement of and along the demand curve The reason for the movement along the demand curve is due to the relative change in the price of the commodity while the cause of the shift in the demand curve occurs for any reason other than that of the price of the commodity such as the price of related goods etc. (Taylor n.d.) For example, the price of computer software and the quantity demanded is $50 and 8 million respectively. When the price of the bread increases to $70, the quantity demanded as a result decreases to 6 million or where the price decreases to $50 from $40 then the quantity demanded increases to 10 million. This phenomenon can be said to be the movement along the demand curve. The reason for the shift of the demand curve is due to the change in factors other than that of price, such as the change in price of the related goods, income of the consumer or preference of the consumer etc. An increase of decrease in these factors can shift the demand curve on either side as the price will remain the same. Factors that cause shift in demand curve The shift in the demand curve happens due to the following factors: Preference of the customer Price of a substitute Price of a complement Income of the consumer such the good is a normal good Income for an inferior good Number of buyers Customer Expectations Preference of the customer: The preference of the customer can be said to be the priority of having a certain good. If the preference of the customer changes then the demand of that particular good may also change. Price of a substitute: Two goods are said to be the substitute of each other when the price of one of the item causes the price of the other item to rise simultaneously or the goods are such identical to each other that a normal consumer may switch to the other good when the price of the prior rises. Price of Compliment: A good is said to be the complement of the other when one good depends on the availability of the other such as coffee and sugar as they complement each other. Income of consumer: The income of the consumer may also cause the shift of the demand curve as the consumer may have more to spend with the change in the demand where his income rises and vice versa. Number of buyers: The number of buyers also affect the demand curve as if the number of buyers are reduced due change of taste or any other mentioned factors, the demand curve will shift and vise versa. Customer Expectations: The customer expectation that the price of a good may increase of decrease can have affect on the demand curve as due to the expected increase in price. The customer will tend to purchase and stock the particular good before the price rises and vice versa may happen when there is a possibility of decrease in price. Causes of shift in the demand curve The above mentioned factors cause the shift of the demand curve as they change, the demand of a particular shift either ways. The causes of the shift are explained below with appropriate examples: Change in Income: The change in income of a consumer is one of the basic causes of the shift in the demand curve. When the income of the consumer increases he will switch to more luxury goods as compared to the normal goods, because of the increase in his purchasing power which provides a better margin to purchase more of a good. This will cause the demand curve to shift to the right. (Bized n.d.) If the good is a normal good, the shift in the demand curve will be towards the right. (Beddone n.d.) Let us consider an example, if burgers are considered as normal goods and the price of the burger is $10 at a given level of income and the demand for burgers is 15 million. If the income of the consumer increases, the demand curve will shift to the right as the demand of the consumer also increases proportionately. This is because the consumer will tend to buy more of the normal good. (McEachern n.d.) It is explained by the diagram. This condition is inverse for goods that are inferior. Inferior goods are those goods, the demand for which is very less in a normal course such as used clothes and public transport etc. Hence, when the consumer income will increase and the consumer will be better off than he was before therefore he will tend to purchase less of inferior goods and more of normal or superior good. Therefore, the demand curve will shift leftwards. Change in price of substitutes: The change in the price of the substitutes also shifts the demand curve, provided that the price of the commodity remains constant. A consumer would choose a certain commodity out of a few other similar commodities based on his taste and the relative price of the commodity. (Thomsen n.d.) Let us consider that sandwich is a substitute of a burger. If the price of the sandwich will also cause the increase in demand of the pizzas, other things remain constant. This will cause the demand curve to shift rightward and conversely when the price of sandwich decreases, it will shift the demand curve leftwards as a consumer will shift towards the substitute causing the demand of that substitute to rise proportionately. Change in price of complement: The change in price of a complement also affects the shifting of the demand curve. Complement goods are those that an increase in price of one commodity will cause the decrease in demand of the other complementing commodity. Let’s say, soft drinks are the complement of the burger therefore a rise in the price of soft drinks will cause the demand of the burger to decrease which will cause the demand curve to shift leftwards. This phenomenon is because of the fact that if the price of soft drink rises, the consumer will reduce to consumption of pizza as they complement each other and vice versa may happen for the decrease in price of soft drink as the demand of burgers will also rise. Another noticeable fact is that the increase in price of an unrelated good may also shift the demand curve leftwards as the real income will reduce. For example, an increase in prices of real estate, which is unrelated to burger, will reduce the income of the consumer so he will have less to spend on other commodities such as burgers. Change in Taste, Preference and Expectation of consumer: The preference of a consumer also shifts the demand curve on either way. Let’s say, the consumer starts preferring pizza in place of burgers which will cause the demand of burgers to reduce which ill cause the demand curve to shift leftward and vice versa. A change in the preference may also be as a result of the consumer expectations, if a consumer expects that the prices of burger will rise in the future then the consumer will rather buy more burgers today to satisfy his want which may shift the demand curve to the right causing the demand of burgers to increase. Change in number of buyers: The increase in number of buyers of a certain commodity may also shift the demand curve to the right as the demand for that good will increase as a result and conversely the decrease will shift the demand curve leftwards. References Beddone, Douglas. "Demand." MBA Econ. Bized. http://www.bized.co.uk/virtual/vla/theories/demand_curve_movements.htm. McEachern, William A. Economics: A Contemporary Introduction. Taylor, John B. Economics. Thomsen, F. L. "Vertical and Horizontal shifts in demand." Farm Economics. Read More