Before we know what demand curve is and the shifting of the demand curve we need to understand demand itself.
Demand Curve in economics-Factors that influence demand:
The Demand is defined as the willingness and ability to buy a specific product in a specific quantity at a specific price over some time. A demand can easily be shown on a table.
So a demand curve shown in a table or graph can have an unusual shape. That demand can show us different prices of products.
Remember when we are discussing demand and analyzing the demand curve, only willingness isn’t important but the buyer should have the ability to buy the product also.
Simultaneously, if the buyer can buy the product. But is not willing to buy it, even then we don’t consider it while we discuss demand and the demand curve.
The following graph shows the relationship between the various prices of corn and the quantity of corn a particular consumer would be willing and able to purchase at each of these prices.
In the figure, if the price of corn were $5 per bushel, our consumer would be willing and able to buy 10 bushels per week. If it was $4, the consumer would be willing and able to buy 20 bushels per week; and so forth.
If we say that “A consumer will buy 10 bushels of corn at $5 per bushel” will be meaningless. But it will be better if we say “A consumer will buy 10 bushels of corn per week at $5 per bushel” to make it more meaningful. Unless a specific time is stated, we do not know whether the demand for a product is large or small.
Law Of Demand:
The whole economy is governed by demand and supply and demand is controlled by the Law of Demand that can be easily demonstrated in the demand curve too.
A fundamental characteristic of demand is this:
If the price of a product rises the demand will fall down but if price falls down the demand for the products will rise.
In short, price and quantity demanded are inversely related to each other. This is why the demand curve always slopes downwards. In economics, this statement is known as the demand curve.
Income effect suggests that a lower price of a product means an increase in the buying ability of the buyer and thus a relative increase in demand as well. A higher price works oppositely and results in a decrease in demand for the product.
Substitution effect suggests that a lower price ensures that the product has an edge over its substitutes that are now relatively more expensive. It means the demand for the product will increase automatically.
Similarly increasing the price will mean a decrease in own demand and shift of buyer’s interest towards the competitive substitute.
Recommended Article: What is Price Ceiling.
Factors that Influence Demand Curve:
The demand for a certain product is influenced by not only price but various other factors too. A few of which are:
- Price of other related goods
- Consumer expectations
The following table shows the factors that affect the demand curve of a certain product.
Factors that influence the demand curve:
Sometimes, due to advancements in technology and day to day needs, the taste of consumers shift from one product to the other. For example with the introduction of cars in the market, lesser people bought horses or carts afterwards.
This ultimately causes a reduction in demand for one product and an increase in demand for the other product.
Most of the times, an increase in income of a household causes a relative increase in demand for that product. Any person or consumer will buy more products if their income will increase. But if their income will be low, the demand for products will fall.
For example, an increase in income causes the buyers to buy more luxury items than they did before.
Price of other Related Products:
If the price of other products (which are related or same), rises or falls, will affect the demand for a particular product.
If the price of a substitute increases the demand for its good also increases and vice versa. Any good or product which can be used together with other products will be called supportive products.
When the price of complementary good increases then ultimately the demand for own good decrease and vice versa.
Changes in consumer expectations may shift demand. A newly formed expectation of higher future prices may cause consumers to buy now to “beat” the expected price rises, thus increasing current demand.
For example in a real estate business. A buyer may think of increasing the prices of houses and buy a house. These—speculators—believe they will be able to sell the houses later at a higher price. And thus they increase the housing demand.
Also, the buyer may plan to spend more money to earn more in future.
In summary, an increase in demand—the decision by consumers to buy larger quantities of a product at each possible price—may be caused by:
A favourable change in consumer tastes.
An increase in the number of buyers.
If exchangeable goods price increase.
If supporting product price decreases.
Income rising for normal products.
Income falling for a low-level product.
New buyer predictions about prices and their incomes.