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 Macroeconomics. This is Kate. This tutorial is on shifts in demand. As always, my key terms are in red and examples are in green.
So in this tutorial will be comparing what causes a movement along a demand curve versus what causes a shift of the demand curve. I'll explain to you that changes in price are what cause movement along the curve. And then we'll look at how changes in other factors change or shift the demand curve itself.
So let's remind ourselves what the law of demand is. The law of demand is defined as the inverse or negative correlation between price and quantity with all other variables fixed.
So here's my demand for Granny Smith apples. Notice that as the price is high, I don't really want to purchase money at all. I'm saying that at $2 I would not want to write any Granny Smith apples. But as the price falls, notice that I would like to purchase more and more and more. So this would be like if I were surveyed. How many apples would you purchase at these different prices? As they are $0.50, I would purchase five of them. Even if they were free, I'm apparently saying that I can only one apple a day, so I would purchase seven in a week if they were free.
When we plot these points-- this is known as a demand schedule-- when we plot those points on a graph with price on the y-axis and quantity on the x-axis, we get our demand curve.
Notice that the law of demand suggested a negative or inverse relationship between price and quantity. As the price of Granny Smith apples falls, I am saying that I would purchase more. As the price rises, this way, I would purchase less. So as the price changes we're moving along this demand curve.
So that's what I just said. As the price is changing, the only reason I am purchasing more, the only reason that I am responding, that I would purchase five, right here, is because they're $0.50. If they go up in price, I would purchase fewer apples. I only purchase more because the price is changing.
Because that's just talking about the relationship between the y and the x-axis-- those are the only two things varying here-- we can just move along this curve to show the relationship between price and quantity. So that's why this is a change in quantity demanded, not a change in demand itself. So you would not say the price of apples went up, I demand less. You would say since the price of apples went up, the quantity I am demanding went down. So that's just very important terminology that you need to be aware of. So movements along the demand curve are defined as demonstrated when the price of the product changes and impacts the quantity demanded.
But this all seems ceteris paribus, holding everything else constant. And we know that that's not always the case. So as, like we said, the price of Granny Smith apples goes up, we can expect people to buy fewer Granny Smith apples. But this ceteris paribus thing says only the price of Granny Smith apples has changed.
That's not always the real world, right? This is assuming that nothing else changed. The price of Gala apples didn't change. The price of other substitutes for apples like oranges or bananas didn't change. My income didn't change. Only the price of Granny Smith apples.
So, what if something else changes like it very often does? Say, for two examples here, I have to take a significant pay cut. Or I read an article that says, "Granny Smith apples are the least healthy apple." Will I really still buy the same amount of Granny Smith apples that I responded on that first slide? Will my relationship between price and quantity be the same now? It won't.
So here, remember my numbers before. Notice my numbers are totally different at these same prices. So before, I was willing to purchase an apple when they were $1.50 each. Now that I took a pay cut, no, that's too rich for my blood. I can't afford Granny Smith apples now that I took a pay cut. Or if I read that Granny Smith apples are very unhealthy, I will buy fewer at all prices.
So when we plot these new points, notice we can't just move along this curve. There is a completely different relationship between price and the quantity that I'm buying. I'm not buying fewer because the price went up. I'm buying fewer because of something else that changed. I am buying a different quantity at every single price on this new curve. So that's why a new demand curve is needed.
Here is where we're actually going to be able to say that demand has shifted or my demand has changed. So a shift in demand is a change in something other than price that's affecting our purchasing behavior.
So this is a summary of the things that do cause a shift in demand. Like I suggested to you, changes in income can impact how much we buy of things. We can either decide to buy more of most things as our income goes up-- those are known as normal goods-- but there are some things like generic brands that we actually buy less up as our income goes up.
When related goods change in price, that can actually change my demand for a good itself. So I'll give you some examples of substitutes and complements. That example of me reading about apples being unhealthy, that's a change in taste or preferences or advertising. And finally, if the number of consumers in a market change, that can obviously impact the amount of demand for something.
So back to our decrease in demand here, I'm reminding you that the price of Granny Smith apples didn't change. But if I make less money, I cannot afford as many. I buy fewer apples at all prices, so we decreased our demand to the left here. For most goods, as I said, an increase in income will cause an increase in demand and a decrease in income would cause a decrease in demand. There are some goods called inferior goods where it would be the opposite, that an increase in income would cause us to buy fewer generic brands, for example. Or a decrease in income would cause us to buy more generic brands.
Changes in prices of related goods is another thing that will shift our demand curve. So if something related to Granny Smith apples changes in price, that can affect how many Granny Smith apples I buy, even though the price of Granny Smith did not change itself.
So let's talk about substitutes and complements. Substitutes in production and consumption say that as the price of one good increases the demand for an alternative good meeting the same producer or consumer need will increase. So, if Granny Smith apples are the only ones that get much more expensive, now my quantity demanded for them will decrease. We can see that as movement along my Granny Smith apple demand curve. But how do I respond? Well, I buy more Gala apples, my second favorite kind of apples. They meet the same consumer need for me. So that's a substitute. My demand for gala apples has shifted because Gala apples did not change in price, yet now I'm purchasing more of them.
Complements in production consumption have a different behavior here. This is a good for which the demand increases as the price of an associated good decreases. So for example, I eat apples and peanut butter together. If peanut butter goes on sale, I buy more. That's movement along my demand curve for peanut butter. But apple's didn't change in price. I'm going to buy more apples to go with my P0 butter. So I buy more of them. That's a change in demand for apples because the price of apples did not change, yet I'm buying more. So that's what this is showing here. If that price of P0 butter was on sale, my demand curve for apples is shifting to the right because I'm buying more to go along with my P0 butter.
Changes in tastes and preferences are things like really good news reports or negative news reports. I remember way back when Tickle Me Elmo was on a popular show and every mom out there wanted to get it for their kid. It was this huge increase in demand. And then there are always negative news reports. Say we hear on the news tonight that there was an E. coli break out in spinach in your area. At all prices, people will be purchasing less spinach. So that would be a decrease in demand.
So the basic idea here, as a summary for you, is to know whether it's a change in quantity demanded or demand. A change in the price of the good itself will give you a change in quantity demanded or movement along the same demand curve. A change in any other factor, like changes in tastes and preferences, substitutes and complements, income, all those things could potentially shift the demand curve and be when we do say that's a change in demand, an increase or decrease in demand itself. Keep in mind that different situations will shift the curve more so than others.
So in this tutorial, we looked at what causes movement along the demand curve. And that was due to a change in the price of that good. And then finally we went through some examples of things that do in fact shift the demand curve. And I am just reminding you here that these are the reasons why a demand curve can shift.
Thank you so much for listening. Have a great day.
Law of Demand
The inverse correlation between price and quantity with all other variables fixed.
Holding all other variables constant.
Substitutes (production and consumption)
As the price one good increases, the demand for an alternative good meeting the same producer or consumer need, increases.
Complements (production and consumption)
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.