Before we begin, let's review the law of demand, which is defined as the inverse or negative correlation between price and quantity with all other variables fixed.
Here are a demand schedule and demand graph for Granny Smith apples.
Price of Granny Smith Apples | Quantity of Granny Smith Apples Each Week |
---|---|
$2.00 | 0 |
$1.75 | 1 |
$1.50 | 2 |
$1.25 | 3 |
$1.00 | 4 |
$0.75 | 5 |
$0.50 | 6 |
$0.25 | 7 |
$0.00 | 8 |
Notice that when the price is high at $2 per apple, you do not want to purchase any apples at all. However, as the price falls, you want to purchase more and more. At $1.50, you might buy two a week; if the price was only $0.50 an apple, you would purchase six, and if they were $0.25, you would purchase seven. Now, if the apples were free, you likely would eat more than an apple a day, so you would buy eight in a week.
When we plot the points of the demand schedule on a graph with price on the y-axis and quantity on the x-axis, it provides the demand curve.
Notice that the law of demand suggests a negative or inverse relationship between price and quantity. As the price of Granny Smith apples falls, you would purchase more. As the price rises, you would purchase less. Therefore, as the price changes, we are moving along the demand curve.
The price change is the only reason you are purchasing more. For instance, you would purchase six apples only because they each cost $0.50. If they go up in price, you will purchase fewer apples.
Now, this is only describing a relationship between price, on the y-axis, and quantity, on the x-axis. These are the only two variables, so we can only move along the demand curve to show the relationship between price and quantity.
Therefore, this is a change in quantity demanded, not a change in demand itself. You would not say that if the price of apples went up, you demand less. Rather, you would say that since the price of apples went up, the quantity you are demanding decreases.
Movements along the demand curve are demonstrated when the price of the product changes and impacts the quantity demanded.
Now, the law of demand governing these movements along the demand curve assumes ceteris paribus, holding everything else constant, although this is not always the case.
As mentioned, when the price of Granny Smith apples goes up, we can expect people to buy fewer Granny Smith apples. However, ceteris paribus assumes that only the price of Granny Smith apples--and nothing else--has changed.
The price of Gala apples did not change, nor did the price of other substitutes for apples like oranges or bananas. Your income did not change, either--only the price of Granny Smith apples.
Now, what if something else does change, as it very often does? Suppose you have to take a significant pay cut, or you read an article stating that Granny Smith apples are the least healthy apple. Will you still buy the same amount of Granny Smith apples? Will the relationship between price and quantity be the same?
The answer is no.
So, here is a new demand schedule for Granny Smith apples. Notice that compared to our original demand schedule, the numbers are totally different at the same prices.
Price of Granny Smith Apples | Quantity of Granny Smith Apples Each Week |
---|---|
$2.00 | 0 |
$1.75 | 0 |
$1.50 | 0 |
$1.25 | 0 |
$1.00 | 1 |
$0.75 | 2 |
$0.50 | 3 |
$0.25 | 4 |
$0.00 | 5 |
Before, you were willing to purchase an apple when they were $1.75 each. Now that you took a pay cut, though, you cannot afford Granny Smith apples at that price. Alternatively, perhaps now you are concerned that Granny Smith apples are unhealthy, so you will buy fewer at all prices.
When we plot these new points, notice we cannot simply move along the original demand curve. There is an entirely different relationship between price and the quantity that you are buying.
You are not buying fewer because the price went up; you are buying fewer because something else that changed. You are buying a different quantity at every price. Therefore, a new demand curve is needed.
This represents a shift in demand, which is a change in something other than price that affects purchasing behavior.
Here is a summary of the factors that cause a shift in demand. We will cover each of these in further detail:
Let's refer to the graph illustrating a decrease in demand. Remember, the price of Granny Smith apples did not change. However, if you make less money, you cannot afford as many and will buy fewer apples at all prices. Therefore, demand shifted to the left.
For most goods, meaning normal goods, an increase in income will cause an increase in demand, while a decrease in income would cause a decrease in demand.
Now, the opposite is true for some goods called inferior goods, such as generic brands, whereby an increase in income would cause us to buy fewer of them, while a decrease in income would cause us to buy more of them.
EXAMPLE
If Granny Smith apples are the only type of apple that becomes more expensive, the quantity demanded for them will decrease, which is expressed as movement along the Granny Smith apple demand curve. However, how do consumers respond?EXAMPLE
Suppose you eat apples and caramel apple dip together. If caramel apple dip goes on sale, you buy more, which is expressed as movement along the demand curve for caramel apple dip. However, even though the price of apples did not change, you are also going to buy more apples to go with your caramel apple dip. This represents a change in demand for apples, or a shift of the demand curve to the right, because the price of apples did not change, yet you are buying more of them.
EXAMPLE
For example, the child's toy Tickle Me Elmo was featured on a popular television show, so every parent in the market wanted to purchase it for their child, resulting in a massive increase in demand.Negative news reports or fads going out of style result in a decrease in demand.
EXAMPLE
Suppose you hear on the news tonight that there was an E. coli outbreak in spinach in your local area. At all prices, people will be purchasing less spinach, which is a decrease in demand.Source: Adapted from Sophia instructor Kate Eskra.