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Changes in demand for a commodity can be shown through the demand curve in two ways: (1) Movement Along

the Demand Curve and (2) Shifts of the Demand Curve.

(1) Movement Along the Demand Curve:


Demand is a multivariable function. If income and other determinants of demand such as tastes of the consumers, changes in prices of related goods, income distribution, etc., remain constant and there is a change only in price of the commodity, then we move along the same demand curve. In this case, the demand curve remains unchanged. When, as a result of change in price, the quantity demanded increases or decreases, it is technically called extension and contraction in demand. The demand curve, which represents various price quantities, has a negative slope. Whenever there is a change in the quantity demanded of a good due to change, in its price, there is a movement from one point price quantity combination to another on the same demand curve. Such a movement from one point price quantity combination to another along the same demand curve is shown in figure below.

Figure:

Here the price of a commodity falls from $8 to $2. As a result, therefore, the quantity demanded increases from 100 units to 400 units per unit of time. There is extension in demand by 300 units. This movement is from one point price quantity combination (a) to another point (b) along a given demand curve. On the other hand, if the price of a good rises from $2 to $8, there is contraction in demand by 300 units. We, thus, see that as a result of change in the price of a good, the consumer moves along the given demand curve. The demand curve remains the same and does not change its position. The movement along the demand curve is designated as change in quantity demanded.

(2) Shifts in Demand Curve:


Demand, as we know, is determined by many factors. When there is a change in demand due to one or more than one factors other than price, results in the shift of demand curve.

For example, if the level of income in community rises, other factors remaining the same, the demand for the goods increases. Consumers demand more goods at each price per period of me (rise or Increase in demand). The demand curve shifts upward from he original demand curve indicating that consumers at each price purchase more units of commodity per unit of time. If there is a fall in the disposable income of the consumers or rise in the prices of close substitute of a good or decline in consumer taste or non-availability of good on credit, etc, etc., there is a reduction in demand (fall or decrease in demand). The fall or decrease in demand shifts the demand curve from the original demand curve to the left. The lower demand curve shows that consumers are able and willing to buy less of the good at each price than before.

Schedule:
Pdx ($) 12 6 4 Qdx 100 250 500 Rise in Qdx 300 500 600

Fall in Qdx
50 200 300

Diagram/Figure:

In this figure, (4.4) the original demand curve is DD/. At a price of $12 per unit, consumers purchase 100 units. When price falls to$4 per unit, the quantity demanded increases to 500 units per unit of time. Let us assume now that level of income increases in a community. Now consumers demand 300 units of the commodity at price of $12 per unit and 600 at price of $4 per unit. As a result, there is an upward shift of the demand curve DD2. In case the community income falls, there is then decrease in demand at price of $12 per unit. The quantity demanded of a good falls to 50 units. It is 300 units at price of $4 unit per period of time. There is a downward shift of the demand to the left of the original demand curve.

Summing Up: (i) Extension in demand is due to reduction in price. (ii) Increase in demand occurs due to changes in factors other than price. (iii) Contraction in demand is the result of a rise in the price commodity. (iv) A decrease in demand follows a change in factors other than price. (v) Changes in demand both increase and decrease is representing shifts in the demand curve. (vi) Changes in the quantity demanded are represented by move along the same demand curve.

Shifts in the Demand Curve Caused by Changes in the Conditions of Demand There are two possibilities: either the demand curve shifts to the right or it shifts to the left. In the diagram below we see two shifts in the demand curve:

D1 D3 would be an example of an outward shift of the demand curve (or an increase in demand). When this happens, more is demanded at each price. A movement from D1 D2 would be termed an inward shift of the demand curve (or decrease in demand). When this happens, less is demanded at each price.

The conditions of demand The conditions of demand for a product in a market can be summarised as follows: D = f (Pn, PnPn-1, Y, T, P, E) Where: Pn = Price of the good itself PnPn-1 = Prices of other goods e.g. prices of Substitutes and Complements Y = Consumer incomes including both the level and distribution of income T = Tastes and preferences of consumers

P = The level and age-structure of the population E = Price expectations of consumers for future time periods Changing prices of a substitute good Substitutes are goods in competitive demand and act as replacements for another product. For example, a rise in the price of Esso petrol should cause a substitution effect away from Esso towards competing brands. A fall in the monthly rental charges of cable companies or Vodafone mobile phones might cause a decrease in the demand for British Telecom services. Consumers will tend over time to switch to the cheaper brand or service provider. When it is easy and cheap to switch, then consumer demand will be sensitive to price changes. Much depends on whether consumers have sufficient information about prices for different goods and services. One might expect that a fall in the charges from one car rental firm such as Budget might affect the demand for car rentals from Avis Hertz or Easycar. But searching for price information to get the best deal in the market can be time consuming and always involves an opportunity cost. The development of the internet has helped to increase price transparency thereby making it easier for consumers to compare relative prices in markets. Changing price of a complement Two complements are said to be in joint demand. Examples include: fish and chips, DVD players and DVDs, iron ore and steel. A rise in the price of a complement to Good X should cause a fall in demand for X. For example an increase in the cost of flights from London Heathrow to New York would cause a decrease in the demand for hotel rooms in New York and also a fall in the demand for taxi services both in London and New York. A fall in the price of a complement to Good Y should cause an increase in demand for Good Y. For example a reduction in the market price of computers should lead to an increase in the demand for printers, scanners and software applications. Change in the income of consumers Most of the things we buy are normal goods. When an individuals income goes up, their ability to purchase goods and services increases, and this causes an outward shift in the demand curve. When incomes fall there will be a decrease in the demand for most goods. Change in tastes and preferences Changing tastes and preferences can have a huge effect on demand. Persuasive advertising is designed to cause a change in tastes and preferences and thereby create an outward shift in demand. A good example of this is the recent surge in sales of smoothies and other fruit juice drinks.

The market for health fruit and vegetable drinks has grown rapidly in recent years following a change in consumer preferences. How much are we influenced by the effects of advertising? The market demand for smoothies The UKs growing thirst for healthy eating and fears about the longer term health effects of the consumption of fast food has meant that the demand for smoothies and other fresh fruit drinks has expanded rapidly in recent years. Innocent, the leading brand in supermarkets, estimates that the market could be worth 170m in 2007. More and more retail outlets such as Crussh are appearing on the high streets, and demand is rising in school canteens and workplaces. Innocent has seen its turnover expand to 37m in the past six years and has over 50 per cent of the UK market. It sells 1m smoothies a week, compared with 20 on its first day of operation in 1999. Some stockmarket experts are forecasting that a fruit juice manufacturer could eventually enter the FTSE-100 list of top stock market businesses. Source: Adapted from news reports, June 2006 and the Innocent web site Discretionary income Discretionary income is disposable income less essential payments like electricity & gas and, especially, mortgage repayments. An increase in interest rates often means an increase in monthly mortgage payments reducing demand. And during 2005 and 2006 we have seen a sharp rise in the cost of utility bills with a series of hikes in the prices of gas and electricity. This has eaten into the discretionary incomes of millions of households across the UK. The discretionary incomes of people suffering from fuel poverty have become a major current issue. Interest rates and demand Many products are bought on credit using borrowed money, thus the demand for them may be sensitive to the rate of interest charged by the lender. Therefore if the Bank of England decides to raise interest rates the demand for many goods and services may fall. Examples of interest sensitive products include household appliances, electronic goods, new furniture and motor vehicles. The demand for housing is affected by changes in mortgage interest rates.

The buyers' demand is represented by a demand schedule, which lists the quantities of a good that buyers are willing to purchase at different prices. An example of a demand schedule for a certain good X is given in Table 1 . Note that as the price of good X increases, the quantity demanded of good X decreases. TABLE 1 Demand Schedule for Good X Price of good X Quantity demanded $0 2 4 6 8 10 5 4 3 2 1 0

This kind of behavior on the part of buyers is in accordance with the law of demand. According to the law of demand, an inverse relationship exists between the price of a good and the quantity demanded of that good. As the price of a good goes up, buyers demand less of that good. This inverse relationship is more readily seen using the graphical device known as the demand curve, which is nothing more than a graph of the demand schedule. A demand curve for the demand schedule given in Table 1 is presented in Figure 1 .

Figure 1Demand curve for good X The vertical axis in Figure 1 depicts the price per unit of good X measured in dollars, while the horizontal axis depicts the quantity demanded of good X measured in units of good X. In addition to the demand schedule and the demand curve, the buyers' demand for a good can also be expressed a third wayalgebraically, using a demand equation. The demand equation relates the price of the good, denoted by P, to the quantity of the good demanded, denoted by Q. For example, the demand equation for good X corresponding to the demand schedule in Table 1 and the demand curve in Figure 1 is

From the demand equation, you can determine the intercept value where the quantity demanded is zero, as well as the slope of the demand curve. In the example above, the

intercept value is 10 and the slope of the demand curve is 2. In order to satisfy the law of demand, the slope of the demand equation must be negative so that there is an inverse relationship between the price and quantity demanded. Change in the quantity demanded. A change in the quantity demanded is a movement along the demand curve due to a change in the price of the good being demanded. As an example, suppose that in Figure 1 the current market price charged for good X is $4 so that the current quantity demanded of good X is 3 units. If the price of good X increases to $6, the quantity demanded of good X moves along the demand curve to the left, resulting in new quantity demanded of 2 units of good X. The change in the quantity demanded due to the $2 increase in the price of good X is 1 less unit of good X. Similarly, a decrease in the price of good X from $4 to $2 would induce a movement along the demand curve to the right, and the change in the quantity demanded would be 1 more unit of good X. Change in demand. A change in demand is represented by a shift of the demand curve. As a result of this shift, the quantity demanded at all prices will have changed. Figures 2 (a) and 2 (b) present just two of the many possible ways in which the demand curve for good X might shift. In both figures, the original demand curve is the same as in Figure 1 and is denoted by DA . In Figure 2 (a), demand curve DA has shifted to the left to the new demand curve DB . The leftward shift means that at all possible prices, the demand for good X will be less than before. For example, before the shift, a price of $4 corresponded to a quantity demanded of 3 units of good X. After the shift left, at the same price of $4, the quantity demanded is less, at 1 unit of good X. In Figure 2 (b), demand curve DA has shifted to the right to the new demand curve DC . The rightward shift means that at all possible prices, the demand for good X will be greater than before. For example, before the shift, a price of $6 implied a quantity demanded of 2 units of good X. After the shift, at the same price of $6, the quantity demanded is greater, at 4 units of good X.

Figure 2A change in demand: Leftward and rightward shifts of the demand curve for good X

Reasons for a change in demand. It is important to keep straight the difference between a change in quantity demanded, or a movement along the demand curve, and a change in demand, or shift in the demand curve. There is only one reason for a change in the quantity demanded of good X: a change in the price of good X; however, there are several reasons for a change in demand for good X, including:
1. Changes in the price of related goods: The demand for good X may be changed by

increases or decreases in the prices of other, related goods. These related goods are usually divided into two categories called substitutes and complements. A substitute for good X is any good Y that satisfies most of the same needs as good X. For example, if good X is butter, a substitute good Y might be margarine. When two goods X and Y are substitutes, then as the price of the substitute good Y rises, the demand for good X increases and the demand curve for good X shifts to the right, as in Figure 2 (b). Conversely, as the price of the substitute good Y falls, the demand for good X decreases and the demand curve for good X shifts to the left, as in Figure 2 (a). A complement to good X is any good that is consumed in some proportion to good X. For example, if good X is a pair of shoelaces, then a complement good Y might be a pair of shoes. When two goods X and Y are complements, then as the price of the complementary good Y rises, the demand for good X decreases and the demand curve for good X shifts to the left, as in Figure 2 (a). Conversely, as the price of the complementary good Y falls, the demand for good X increases and the demand curve for good X shifts to the right, as in Figure 2 (b). 2. Changes in income: The demand for good X may also be affected by changes in the incomes of buyers. Typically, as incomes rise, the demand for a good will usually increase at all prices and the demand curve will shift to the right, as in Figure 2 (b). Similarly, when incomes fall, the demand for a good will decrease at all prices and the demand curve will shift to the left, as in Figure 2 (a). Goods for which changes in demand vary directly with changes in income are called normal goods. There are some goods, however, for which an increase in income leads to a decrease in demand and a decrease in income leads to an increase in demand. Goods for which changes in demand vary inversely with changes in income are called inferior goods. For example, consider the two goods meat and potatoes. As incomes increase, people demand relatively more meat and relatively fewer potatoes, implying that meat may be regarded as a normal good, and potatoes may be considered an inferior good. 3. Changes in preferences: As peoples' preferences for goods and services change over time, the demand curve for these goods and services will also shift. For example, as the price of gasoline has risen, automobile buyers have demanded more fuel-efficient, economy cars and fewer gas-guzzling, luxury cars. This change in preferences could be illustrated by a shift to the right in the demand curve for economy cars and a shift to the left in the demand curve for luxury cars. 4. Changes in expectations: Demand curves may also be shifted by changes in expectations. For example, if buyers expect that they will have a job for many years to come, they will be more willing to purchase goods such as cars and homes that require payments over a long period of time, and therefore, the demand curves for these goods will shift to the right. If buyers fear losing their jobs, perhaps because of a recessionary economic climate, they will demand fewer goods requiring long-term payments and will therefore cause the demand curves for these goods to shift to the left.

References:
http://economicsconcepts.com/movement_vs_shift_of_demand_curve.htm http://tutor2u.net/economics/revision-notes/as-markets-demand.html http://www.cliffsnotes.com/study_guide/Demand.topicArticleId-9789,articleId-9728.html