Source: Image of Demand Graph created by Kate Eskra, Image of Demand Shift (Decrease) created by Kate Eskra, Image of Demand Shift (Increase) created by Kate Eskra
Hi. Welcome to economics. This is Kate. This tutorial is called Changes in Demand and Movements along a Demand Curve. As always, my key terms are in red and my examples are in green.
So in this tutorial, we'll be comparing what causes a movement along a demand curve versus what causes a shift of the demand curve itself. You'll understand at the end that changes in price are what cause movement along the curve, and changes in other factors that we'll be going over are what change or shift the demand curve itself. I know these two things sound similar, but they are quite different.
OK. So first of all, movements along our demand curve are when the price of the product changes. And that's going to only impact quantity demanded. So let me show you. Here's an example for my demand for Granny Smith apples. I happen to be an apple lover. I have one almost every day for lunch. And I really like the really tart ones, the Granny Smith ones. So I just made these numbers up.
Here's the price per apple. $2.00 is a pretty expensive apple, right? So that's where apparently I decided to draw the line, and I'm not going to have any. Notice as the price falls, I decide to purchase more. And there's my graph for it. I plotted the points. And you can see that at $2.00, I don't buy any. And quantity's along this axis, price is on that axis. At free, I purchase seven, one for every day of the week. If they were only $0.50, I'd buy five. And so on and so forth.
So the idea here is that as the price falls, the quantity I'm demanding is rising. And that's what we mean by movement along this curve. OK. This is a downward sloping demand curve, because as things get less expensive we buy more. And that's all it means by movement along the demand curve. The only thing changing is price. So that's why I'm buying more.
OK. And this is important terminology. As price goes up or as price goes down, we say that our quantity demanded is rising or falling. And again, there's an inverse relationship between the two which can be shown by movement along the demand curve.
That assumes something called ceteris paribus. And ceteris paribus means we're holding everything else constant. So as the price of Granny Smith apples is rising, we can expect that people will buy fewer of them because they're more expensive. That assumes that the only thing that's changed here is the price of Granny Smith apples.
The price of Gala apples didn't change. The price of oranges or bananas or any other fruit didn't change. Our income didn't change. Nothing else. We're just isolating price. Nothing else other than the price changed, and that's what ceteris paribus is telling us.
But we know that's not the real world. Things are changing other than the price of one good all the time. So if something else changes, now we have to talk about what the result will be. So let's say I have to take a significant pay cut in my wages. Or maybe I read an article that says Granny Smith apples are actually the least healthy of all apples.
If either of those two things happen, am I still going to buy the same amount of Granny Smith apples? Probably not. I'm probably going to buy fewer Granny Smith apples, right? But I didn't tell you that they changed in price, because they didn't. OK.
So here note are the same prices that I had before, but now I'm purchasing a different quantity. OK. So because I read that Granny Smith apples aren't as healthy for me or-- either way-- or my income changed, I am now not buying any of them until they reach $0.75. And in fact, when they're $0.25, I'm only buying three. When they're free, I'm only buying four.
Because of that, there's a new relationship now between price and quantity. I need a whole new demand curve. And this one right here that I drew represents the new relationship between price and quantity. OK. That's what's called a shift in demand.
So a shift in demand is a change in something other than price that's affecting purchasing behavior. So what is it that causes a shift in demand? Well, a few things. I already mentioned a couple of them. First, changes in income will definitely shift demand. Typically speaking, if our incomes rise, we buy more of most things. If our incomes fall, we buy less of most things. Prices of related goods actually will shift the demand curve for a good itself.
I'll give you some examples, because I know that sounds a little bit confusing right now. And then finally, changes in taste, preferences, or advertising. The example I gave you about reading how Granny Smith apples are less healthy for you, that would be an example of this.
OK. So changes in income. Like I said, if there's an increase in income, our demand would increase. But here, the example I gave you before. I just wanted to reiterate that a decrease in income would result in this graph here. This demand curve shift to the left. OK. If I had an increase in income instead, the demand curve would shift to the right, because I would be purchasing more apples at every single price.
Related goods can really change our demand for another good. So if something related to Granny Smith apples changes in price, now I might buy a different quantity of Granny Smith apples even though the price of Granny Smith apples didn't change itself. OK.
So first of all, let's talk about substitutes. A substitute good means that as the price of one good increases, the demand for an alternative good meeting similar consumer needs increases. So let's say that Granny Smith apples do get more expensive. Well, I already told you. If the price of Granny Smith apples changes, that's only movement along the Granny Smith apple demand curve. So we'd say my quantity demanded for them will decrease.
But that's going to mean I'm going to substitute something. Let's say I substitute with Gala apples. My demand itself for Gala apples has actually increased. It would be a shift to the right for Gala apples because the price of Granny Smith didn't change-- I'm sorry, the price of Granny Smith did change. The price of Gala apples didn't change, Yet I'm purchasing more of them as a substitute for my Granny Smiths.
OK. On the other side of it, we can have complements, things that go together. So here is a good for which the demand increases as the price of an associated good decreases. I eat apples and peanut butter together, so to me they are complements. I really don't like to eat apples, actually, without peanut butter. So let's say that peanut butter, a complement to apples, goes on sale. I'll buy more peanut butter. That's movement along my peanut butter demand curve.
But now that I'm buying more peanut butter, don't I want more apples to go along with my peanut butter or to complement them? I'm now going to buy more apples even though the price of apples didn't change. So that's a change in demand or a shift in demand for apples. What would that look like?
Here we go. So notice that same prices again, but my quantities are increasing even though the price was $2.00-- before I didn't buy any when they were $2.00, now I'm saying, oh. I have all this peanut butter. I at least need one apple to go with it. And so on and so forth. So my quantity increased at every single price. Because of that, if I plot those new points, I need a demand curve over here to the right of my original one. That is an increase in demand or a shift in the demand curve.
Finally changes in taste and preferences or advertisements can affect our demand. So good news reports about a product or something that's a huge fad or experiencing strong advertisements will cause an increase in demand for the product. So I give you an example of Tickle Me Elmo one Christmas season was crazy popular in demand. It was a huge fad. And people were willing to buy way more of them at all prices.
Whereas on the other side, negative news reports or fads going out of style will cause a decrease in demand. Obviously, if we hear on the news tonight that there was a huge E coli breakout in spinach leaves, you're not going to run out to the grocery store and purchased spinach leaves this evening more than likely. So that could cause a decrease in demand.
So what did you learn in this tutorial today? You learned that movement along a demand curve is due to the price of that good changing. So if the price of that good is changing itself, we're only moving along a demand curve. We're going to shift a demand curve when any other variable, like our income, our tastes and preferences, or the prices of something related to it change. Thank you so much for listening. Have a great day.
Terms to Know
Holding all other variables constant
As the price of one good increases, the demand for an alternative good, meeting similar consumer needs, increases.
A good for which the demand increases as the price of an associated good decreases.
Movements Along Demand Curve
Demonstrated when the price of the product changes and impacts the quantity demanded.
Shift in Demand
A change in something other than price affects purchasing behavior.