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Understanding Demand Curves
There is a difference between what causes a shift or a movement along the demand curve. It is important to know the difference between them.
The key difference:
A shift in the demand curve means that at the exact same price, consumers wish to buy more.
A movement along the demand curve occurs following a change in price.
Movements Along Demand Curves
Key Point: Only a change in price causes a movement along the demand curve. A change in price does not shift the demand curve. We just move from one point on the demand curve to another.
let’s take Black Friday Sales as an example
Scenario: On Black Friday, a major electronics retailer announces discounts on flat-screen televisions. Prior to Black Friday, the price of a 50-inch LED TV was £800.
Price Decrease: On Black Friday, the retailer offers a discount, selling the same 50-inch LED TV for £500, a £300 reduction from its original price.
- Increase in Quantity Demanded: Due to this price reduction, consumers who were previously hesitant to purchase the TV at £800 find the £500 price tag more attractive. As a result, they decide to buy the TV during the Black Friday sale.
- Analysing the Movement: On a demand curve graph, this situation is represented by a movement from a higher price point (£800) to a lower price point (£500), resulting in an increase in the quantity demanded. This movement occurs along the demand curve, assuming other factors affecting demand (such as consumer income, preferences, and prices of substitutes like projectors or larger TVs) remain constant during the sale period.
- Conversely, if the price were to increase from £800 to £1100, there would be a movement along the demand curve resulting in a decrease in the quantity demanded.
Contraction in demand. An increase in price from £800 to £1100 causes a movement along the demand curve, and quantity demand falls from 80 to 60. We say this is a contraction in demand
Expansion in demand. A fall in price from £800 to £500 leads to an expansion (increase) in demand. As price falls, there is a movement along the demand curve and more is bought from 80 to 100.
Exam Tip: If given a scenario and asked to explain it using a relevant demand curve, look for whether there is a mention of an “increase/decrease in price” of a specific good, which indicates a movement along the demand curve.
Causes of Shifts in Demand Curves
Key Point: A shift in the demand curve occurs when, even at the SAME PRICE, consumers are willing to buy a higher or lower quantity of goods.
Definition: Determinants of demand are changes in conditions that cause the demand curve to shift either to the left or right.
Mnemonic to Remember Determinants:
You can use the mnemonic "ITAPFAPE" to remember the changes that can shift demand:
Income, Tastes, Advertising, Prices of other goods (substitutes and complements), Fashion, Availability of credit, Population, and Expectations of price changes.
let’s explore how these determinants of demand can shift the demand curve to the right:
Demand curve shifting to the right implies that, at the same price levels, consumers are now willing to buy more of the good or service than before. This indicates an increase in demand.
Determinants of demand and shifting right the demand curve:
- 💰 Income: Higher incomes enable consumers to buy more goods and services, shifting demand curves to the right for normal goods.
- 👍 Tastes (Preferences): Changing preferences towards a product increase demand as more consumers desire it, shifting the demand curve to the right.
- 📢 Advertising: Effective advertising increases consumer awareness and desire, shifting the demand curve to the right.
- 🔄 Prices of Other Goods (Substitutes and Complements):
- Substitutes: Higher prices of substitutes increase demand for the original product, shifting its demand curve to the right.
- Complements: Lower prices of complements increase demand for both goods, shifting their demand curves to the right.
- 👗 Fashion: Trends and fashion shifts increase demand for trendy goods, shifting their demand curves to the right.
- 🏙️ Population: Growth in population increases overall demand for goods and services, shifting their demand curves to the right.
- 💳 Availability of Credit: Easy access to credit allows consumers to buy more, shifting demand curves to the right.
- 📈 Expectations of Price Changes: Anticipation of future price increases leads to higher current demand, shifting the demand curve to the right.
let’s explore how these determinants of demand can shift the demand curve to the left:
Demand curve shifting to the left implies that, at the same price levels, consumers are now willing to buy less of the good or service than before. This indicates an decrease in demand.
Determinants of demand and shifting left the demand curve:
- 💸 Income: Lower incomes reduce purchasing power, decreasing demand for normal goods and shifting their demand curves to the left.
- 👎 Tastes (Preferences): Changing preferences away from a product decrease demand as fewer consumers desire it, shifting the demand curve to the left.
- 🚫 Advertising: Ineffective or negative advertising can decrease consumer interest and demand, shifting the demand curve to the left.
- 🔄 Prices of Other Goods (Substitutes and Complements):
- Substitutes: Lower prices of substitutes decrease demand for the original product, shifting its demand curve to the left.
- Complements: Higher prices of complements decrease demand for both goods, shifting their demand curves to the left.
- 🕴️Fashion: Shifts away from a product in fashion decrease demand, shifting its demand curve to the left.
- 👪 Population: Declines or changes in demographics reduce overall demand for goods and services, shifting their demand curves to the left.
- 💳 Availability of Credit: Tightening credit conditions reduce consumer spending, shifting demand curves to the left.
- 📉 Expectations of Price Changes: Anticipation of future price decreases reduces current demand, shifting the demand curve to the left.
Test Your Knowledge with Scenarios
Exam Tip: In your higher economics exam, you may encounter real-life case study scenarios where there may be questions asking you to draw diagrams illustrating the market effects for specific goods.
These questions will test your ability to understand and analyse shifts in demand curves. Pay close attention to the details provided in the case study.
Practice drawing demand curves for scenarios like the ones below to prepare effectively 👇
Scenario 1 😃 Try it for yourself then click here to see the answers:
Situation: Due to adverse weather conditions in Brazil, the supply of coffee has decreased, leading to a significant increase in coffee prices worldwide.
Question: "Draw a diagram to show the effect on just the demand for tea of the increased price of coffee, assuming tea and coffee are substitutes."
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Scenario 2 😃 Try it for yourself then click here to see the answers:
- Situation: Due to increased fuel costs and regulatory changes, airlines worldwide decide to raise ticket prices for international flights by 15%.
- Question: "Draw a diagram to illustrate the effect of a 15% increase in the price of international airline tickets on the market for air travel."
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Scenario 3 😃 Try it for yourself then click here to see the answers:
- Situation: Following a global economic recession, there has been a sharp decline in consumer incomes in developed countries.
- Question: "Using a demand diagram, illustrate the impact of reduced consumer income on the demand for luxury watches."
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