Shift and Movement of Demand Curve - Coursework Example

Running Head: Shift and Movement of Demand Curve Your name Course name Professors’ name Date Introduction This paper covers shifts and movement of demand curve brought about by changes in economic variables. The essay will begin by addressing shifts in demand curve, which is caused by changes in one or more of determinants of demand curve. Some of these determinants of demand curve are population of consumers, price of substitutes and complements, disposable income, tastes and preferences, and expectations. The paper progresses to discuss movement of demand curve caused by changes in price only. It is vital to demonstrate shifts and movements using graphs. Finally, the paper would give a vivid account of how determinants of demand curve causes a shift. Shifts in Demand Curve The assumption in the case of a shift in demand curve is that demand is linear such that a change in determinant of demand would result in parallel shift of the demand curve (Graves, 2006). According Elfring (1989), changes in price of related goods, employment, expenditure, output, and productivity characterizes shift in demand curve for a service industry. Some of the factors that brought about these changes include change in income per head, consumer tastes, technical progress, investment rate, and expansion of governmental demand for services. A shift is therefore a result of changes in one or more of determinants of demand apart from the price. An example to exemplify shift in demand curve is a situation where income for a community raises consequently exciting demand for goods to increase. The demand curve would shift outward indicating that more is demanded at the same price level. Other factors kept constant, a fall in disposable income, reduces demand thus shifting it to the left. This shift in demand is illustrated in the graph below. In the figure above, D1 is the original demand curve with a price level of $20 and $100 units. When the price level reduces to $10, quantity demanded increases to 300 units. If income of an individual or a community increases, quantity demanded at the price level of $20 is 250 units and 400 units at a price of $10. This would result in an upward shift of demand curve to D2. In a situation where community income falls, there is a decline in demand at a price of $20. The arrows indicate shifts in demand curve either outward or inward. Movement in Demand Curve Demand is a multivariable function and any changes in the price leads to movement along the same demand curve when determinants of demand are kept at a constant level. In this perspective, the determinants of demand curve include but not limited to tastes, price of related products, and income distribution. Movement along the same demand curve occurs when there is a change in quantity demanded due to changes in price. The movement is to a new price and quantity combination. This phenomenon of a falling price is applicable in shorting markets where money is held for speculative purposes (Cohen, 2007). Speculators derive benefits from falling prices of stock. b) Figure showing movement of demand graph from A to B From the graph above, a reduction in price from $8 to $2 increases quantity demanded from 200 to 800 units. This movement takes place from point A, where both price and quantity is combined to point B, along the same demand curve. It is vivid from the graph that changes in the price of a good leads to a move along specific demand curve. This movement is described by a change in quantity of units demanded. Main factors that shift a demand curve Briefly, factors that cause a shift in the demand curve are actually the determinants of demand curve apart from the price. These factors are listed as follows: The number of consumers Price of substitutes and complements Disposable income Changes in tastes and preferences Price expectations In a discussion by Elfring (1989), demand in the service sector can shift due to changes in some macro-economic variables. The variables are listed below. Employment Expenditure Output Prices Productivity How these factors cause a shift in demand curve In an aggregate economy, a change in employment is interlinked with expanding or contacting GDP per capita. Elfring (1989) noted that a rising income per capita leads to a decline in agricultural employment share. The basic causes of this decline in aggregate economy are income elasticity of demand, changes in comparative costs, and changing rate of productivity growth between sectors (Gibson, 1970). The second factor that can shift a demand curve in a service industry is change in expenditure structure that is correlated with rising and falling elasticity and saturation. When income per capita is rising, consumer preferences shift away from necessities to goods and services for recreation. Elfring (1989) clearly elaborates how changes in output structure can contribute to a shift of demand curve in a given service sector. Numerous factors have contributed to growing service output as compared to commodity production. The first one is decline in production industry since the industry is vulnerable to recessions as compared to service sector. Secondly, as innovation and improvement in service productivity continues, there is a shift away from industrial production. Additionally, service output growth has shifted to a better measurable market service away from hard to measure non-market services. Service sector usually faces high changes in the price structure as compared with agricultural and industrial sector (Elfring, 1989). This is contributed by lagging productivity in services, which is a function of fast rising costs. Moreover, the service sector can only remain profitable when prices go up. In the microeconomic context, changes in household income have the effect of increasing or decreasing demand. Similarly, some goods are demanded less when income increases. These are classified as inferior goods. On the contrary, normal goods have the characteristic of increasing proportionally with increased income. In a period of rising income, consumer preferences shift away from necessities since the number of options increases. When preference for a particular good increases, its demand curve shifts automatically to the right. An example to demonstrate effect of preferences on demand curve is fashions, which provide changing consumer preferences. Every year, consumers scramble to buy new products offered in the market. When new toys are introduced in the market young children are excited and their parents rash to purchase them. The price of a substitute or complementary good can face either a rise or a fall. In the case of a substitute, changes in price of one good lead to a higher demand for the substitute good. On the other hand, a complementary good causes demand of another to decrease when its price increases. Changes in population further leads to a shift in demand curve either to the right or to left. When population increases, the demand curve shifts to the right. An example is a food kiosk located near a campus. Demand for food increase when students are in session but decrease when they go on recess. This means that demand will shift to the left when students are away and to the right when they return. Expectation of future prices changes affects the present demand for goods. If there were a news report predicting high prices, current demand would expand as consumers demand more in anticipation of increased price. In the same context, changes in expectations affect demand. If consumers expect that they would have a steady source of income in the future, they are willing to buy goods that require payment over a long period. The demand for these kinds of goods will therefore shift to the right. A situation where consumers fear loosing their jobs stimulates them to purchase less goods requiring long-term payment. This would shift the demand curve to the left. Conclusion This paper presented basic facts on shifts and movement of demand curve. The emphasis was on shift in demand curve caused by changes in determinants of demand curve apart from price. Conversely, movement along a demand curve follows changes in price. While discussing shifts in demand curve, various examples were given and supported in a graphical illustration. In the scenario of service sector, shifts can be caused by changes in employment, expenditure, output, prices, and productivity. Reference List Cohen, L, Karl, D. and Malloy, C., 2007. Supply and Demand Shifts in the Shorting Market. The Journal of Finance, 62(5), p. 2503-2520. Elfring, T., 1989. The Main Features and Underlying Causes of the Shift to Services. The Service Industries Journal, 9(3), p.337 – 356. Gibson. W. E., 1970. The Lag in the Effect of Monetary Policy on Income and Interest Rates. Quarterly Journal of Economics, 84(2), p. 288-300. Graves, E. P. and Sexton, R. l., 2006. Demand and Supply Curves: Rotations versus Shifts. Atlantic Economic Journal, 38(34), p. 361- 364. Read More