We have already talked about the basic model of the demand curve in a previous article. In this article, we shall be talking about certain features of the demand curve. These features include what causes a movement along the demand curve, how the demand curve shifts. We will also be talking about the effects of a change in income, the effects of a change in the price of other goods and the effects of consumers preferences on the position of the demand curve. All these will help us fully understand the demand curve and will allow us to move on to a discussion of the supply curve.
We shall look at a demand curve to understand the movement along the curve.
Let us assume that the above demand curve is the market demand curve for a DVD market. The quantity demand is in thousands. At first, the price of DVDs is Rs. 20. At this price, the demand for the DVDs is at five thousand. Suppose now, that the suppliers of DVDs decide to reduce the price of each DVD to Rs 10 per unit. This means that more people can now buy it and the cheaper price also allows people to buy it more. This causes a movement towards the right along the demand curve. The new price is lower at price Rs 10 and the demand has increased to a total of ten thousand. This is represented by the inverse relationship of demand. A lower price leads to an increase in demand.
Before we discuss factors that shift the demand curve, let us look at a phenomenon called the ‘Snob effect’. The law of demand states that there is an inverse relationship between price and demand. But some economists argue that for some goods, the demand curve can actually be upward sloping, which means a positive relationship. They argue that some consumers just look at some products differently. Goods like, say, a Rolex Watch may lead to people demanding it more simply because they want people to know how rich they. Given how snobbish that sounds, it has been termed the ‘Snob effect’. But this effect only exists in theory. There is no proof that this actually happens.
Let us now move on to discussing what happens to a demand when influences other than price changes. To determine the demand curve, we had set the assumption of ‘Ceteris Paribus’, that is, all other things being equal. Now we will slowly relax this assumption.
First, we will look at the effect of a change in consumer incomes on the demand curve for a product. Let us again take the demand curve for DVDs.
The demand curve here shifts outward to the right. What could happen to consumers incomes that would cause this to happen? If a DVD initially costs Rs 10, and a person earns 200, he may only want to buy one DVD. But now the person starts to earn Rs 500 and the price of the DVDs remains the same at Rs 10. The consumers income, when compared to the price of the DVDs, has now increased. This could lead to him increasing his demand for DVDs to three DVDs as compared to just one earlier. The demand for DVDs at the same price has increased from one to three. This is why the demand curve has shifted to the right. At each price level, the market is now seeing a higher demand for the good. Like the increase in income causes a shift to the right, a decrease in income will lead to less demand for the good at each price level, causing the shift of the demand curve to the left.
What happens when the price of substitutes and complements changes? A substitute is a replacement for the good. If the price of the substitute decreases, it will cause people to shift their demand towards the substitute, shifting the demand for the original good to the left. For example, the demand curve for tea will shift to the left if the price of coffee, its substitute increases. When it comes to complements, an increase in the price of the complement will again lead to the demand curve for the original good to shift to the left. If price of milk increases, the demand for tea, its complement, will shift to the left.
Finally, we will talk about consumer preferences. Consumer preferences again lead to the shifting of the demand curve. If consumer starts to prefer to a good more, the demand for the good at the same price will increase. Let’s say, a certain person suddenly starts to like tea more. At the same price, more goods will be demanded and that will cause the demand curve to shift out to the left and the effect will be the same as in the above diagram.
This concludes our discussion on movement along and shift of the demand curve.