Question

List all the factors that cause the demand curve to shift. Explain what each factor is and provide a real world example of each one.

Answer 1

The factors that cause the demand curve to shift are as follows:

1. Changing tastes or preferences of consumers:

An important factor which determines the demand for a good is the tastes and preferences of the consumers for it. A good for which consumers’ tastes and preferences are greater, its demand would be large and its demand curve will therefore lie at a higher level. People’s tastes and preferences for various goods often change and as a result there is change in demand for them.The changes in demand for various goods occur due to the changes in fashion and also due to the pressure of advertisements by the manufacturers and sellers of different products. A real life example is From 1980 to 2014, the per-person consumption of chicken by Americans rose from 48 pounds per year to 85 pounds per year, and consumption of beef fell from 77 pounds per year to 54 pounds per year, according to the U.S. Department of Agriculture (USDA). Changes like these are largely due to movements in taste, which change the quantity of a good demanded at every price—that is, they shift the demand curve for that good, rightward for chicken and leftward for beef.

2. Income of the People:

The demand for goods also depends upon the incomes of the people. The greater the incomes of the people, the greater will be their demand for goods. In drawing the demand schedule or the demand curve for a good we take income of the people as given and constant. When as a result of the rise in the income of the people, the demand increases, the whole of the demand curve shifts upward and vice versa.The greater income means the greater purchasing power. Therefore, when incomes of the people increase, they can afford to buy more. It is because of this reason that increase in income has a positive effect on the demand for a good. For example : As incomes rise, many people will buy fewer generic-brand groceries and more name-brand groceries. They are less likely to buy used cars and more likely to buy new cars. They will be less likely to rent an apartment and more likely to own a home, and so on.

3. Changes in Prices of the Related Goods:

The demand for a product can also be affected by changes in the prices of related goods such as substitutes or complements. A substitute is a good or service that can be used in place of another good or service.For example, in recent years as the price of tablet computers has fallen, the quantity demanded has increased because of the law of demand. Since people are purchasing tablets, there has been a decrease in demand for laptops. A higher price for a substitute good has the reverse effect.Other goods are complements for each other, meaning that the goods are often used together because consumption of one good tends to enhance consumption of the other. For instance, if price of milk falls, the demand for sugar would also be favorably affected. When people would take more milk, the demand for sugar will also increase. Likewise, when the price of cars falls, the quantity demanded of them would increase which in turn will increase the demand for petrol.

4.Population Shifts:

Shifts in population create changes in demand. A population shift takes place when people move away from a geographic region, impacting your company sales, and when the population you serve ages or outgrows your product or service. For real life example : The proportion of elderly citizens in the United States population is rising. It rose from 9.8% in 1970 to 12.6% in 2000 and is projected by the U.S. Census Bureau to be 20% of the population by 2030. A society with relatively more children, like the United States in the 1960s, will have greater demand for goods and services like tricycles and day care facilities. A society with relatively more elderly persons, as the United States is projected to have by 2030, has a higher demand for nursing homes and hearing aids.

5. Consumers’ Expectations with Regard to Future Prices:

Another factor which influences the demand for goods is consumers’ expectations with regard to future prices of the goods. If due to some reason, consumers expect that in the near future prices of the goods would rise, then in the present they would demand greater quantities of the goods so that in the future they should not have to pay higher prices. For example, if people hear that a hurricane is coming, they may rush to the store to buy flashlight batteries and bottled water. If people learn that the price of a good like coffee is likely to rise in the future, they may head for the store to stock up on coffee now. Similarly, when the consumers expect that in the future the prices of goods will fall, then in the present they will postpone a part of the consumption of goods with the result that their present demand for goods will decrease.