Determinants of demand, what shifts a demand curve? -, Learning Economics... Solved!


Determinants of demand, what shifts a demand curve?

When we draw a demand curve, we are only allowing price and quantity to change (check out the post on endogenous vs. exogenous variables).  However, when constructing the curve, we consider a lot of factors.  The following list goes over the determinants of the demand curve, and when any of these determinants change, we have to change our demand curve to accommodate.

# of buyers (also called demographics or population)- Basically the more people you have, the more demand you will have.  So if the number of people/buyers goes up, you will shift the demand curve right or up.  If you have less buyers/people, demand will shift left/down (demand will go down).

Income-  The more money people make, the more they are able to buy.  So if someone gets a raise,
they will buy more of a good (as long as the good is normal, if it is inferior they will buy less).  In general, when the income level of a nation rises, they will buy more goods and therefore demand will increase (shift right/up).  During a recession, or when people lose their jobs, demand will decrease or shift down/left.

Tastes and preferences-  This concept interpreted in a number of ways so I will give some examples.  If people find out that cell phone cause cancer, they will avoid cell phones because of this news, which will cause the demand decrease or the demand curve to shift left/down.  However, if a new fashion statement is to have a smart phone, then we will see demand increase, or the demand curve will shift right/up.  The thing to keep in mind here is whether the change in the tastes or preferences is positive or negative.  If the change will make people want to buy more, it will increase, but if it is a bad change, demand will decrease.

Price of complements and substitutes- This category needs to be broken down into two sets, complements and substitutes:

Complements-  When the price of a complement goes up, we will see demand for our good go down (shift down/left).  Why?  Because enjoying the good has just become more expensive even if the price of the good has stayed the same.  Imagine hamburgers and hamburger buns, they are complements.  If the price of hamburger remains the same, but the price of hamburger buns goes up, then we are likely to buy less hamburgers as a results because we usually buy the two together.  Likewise, if the price of buns went down, then the total cost of our hamburger/bun package went down so we are likely to buy more of both.

Substitutes-  When the price of a substitute goes up, we will see demand for our good go up (shift up/right).  This is because we want to buy the cheaper good!  If we are going to buy either Coke or Pepsi for our party, and the price of Pepsi goes up, we are likely to buy more Coke!  So if we are looking at the market for Coke and the price of Pepsi rises, we will see demand for Coke increase.  Likewise, if the price of Pepsi goes down, we will see the demand curve for Coke shift left/down (demand decreases).

Wealth-  This effect is similar to income.  When people have more wealth (money in the bank, or assets) then they are more likely to spend money.  Think about the current downturn in the stock market.  If people used to have 500K dollars in their retirement fund, but now only have 200K dollars, they will probably spend less money today, even though their income hasn’t changed.  So if we experience another housing crisis, or stock market downswing, demand is likely to decrease or shift left/down.  While during good times, when the stock market goes up, or the value of our house goes up, we are likely to consume more which means demand increases.

Expected future prices- Finally we have expected future prices.  If we expect the price of something to go up in the future, then we want to buy it now for a cheaper price.  Likewise, if we expect the price of something to decrease, we will wait to buy it when it is cheaper.  This is cause of one of the problems we currently see in the housing market.  Because everyone expects the prices of houses to drop, everyone is waiting to buy.  So when everyone expects the price to go down, demand decreases (shifts left/down).  But if people expect the price to rise, people buy now and demand increases (shifts right/up).