We list and explain four factors that can shift a demand curve:
- Change in consumer incomes: As the previous video rental example
demonstrated, an increase in income shifts the demand curve to the
right. Because a consumer's demand for goods and services is
constrained by income, higher income levels relax somewhat that
constraint, allowing the consumer to purchase more products.
Correspondingly, a decrease in income shifts the demand curve to the
left. When the economy enters a recession and more people become
unemployed, the demand for many goods and services shifts to the left.
- Population change: An increase in population shifts the
demand curve to the right. Imagine a college town bookstore in which
most students return home for the summer. Demand for books shifts to
the left while the students are away. When they return, however, demand
for books increases even if the prices are unchanged. As another
example, many communities are experiencing "urban sprawl" where the
metropolitan boundaries are pushed ever wider by new housing
developments. Demand for gasoline in these new communities increases
with population. Alternatively, demand for gasoline falls in areas with
declining populations.
- Consumer preferences: If the preference for a particular
good increases, the demand curve for that good shifts to the right.
Fads provide excellent examples of changing consumer preferences. Each
Christmas season some new toy catches the fancy of kids, and parents
scramble to purchase the product before it is sold out. A few years ago,
"Tickle Me Elmo" dolls were the rage. In the year 2000 the toy of
choice was a scooter. For a given price of a scooter, the demand curve
shifts to the right as more consumers decide that they wish to purchase
that product for their children. Of course, demand curves can shift
leftward just as quickly. When fads end suppliers often find themselves
with a glut of merchandise that they discount heavily to sell.
- Prices of related goods: If prices of related goods
change, the demand curve for the original good can change as well.
Related goods can either be substitutes or complements.
- Substitutes are goods that can be consumed in place of
one another. If the price of a substitute increases, the demand curve
for the original good shifts to the right. For example, if the price of
Pepsi rises, the demand curve for Coke shifts to the right. Conversely,
if the price of a substitute decreases, the demand curve for the
original good shifts to the left. Given that chicken and fish are
substitutes, if the price of fish falls, the demand curve for chicken
shifts to the left.
- Complements are goods that are normally consumed
together. Hamburgers and french fries are complements. If the price of a
complement
increases, the demand curve for the original good shifts to the left.
For example, if McDonalds raises the price of its Big Mac, the demand
for french fries shifts to the left because fewer people walk in the
door to buy the Big Mac. In contrast, If the price of a complement
decreases, the demand curve for the original good shifts to the right.
If, for example, the price of computers falls, then the demand curve for
computer software shifts to the right.
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