Question

Changes in variables other than the price of a good, such as income or the price of another good lead to a change in demand. This corresponds to a shift of the entire demand curve. Critically analyze the law of demand and identify factors that cause demand to shift to the above situation (through diagram)

Answer 1

As per the Law of Demand: when other things being equal,if the price of a commodity falls, the quantity demanded of it will rise and if the price of a commodity rises, it's quantity demanded will decline.

Thus it indicates the inverse relationship between price and quantity demanded.

Clearly the demand curve moves upwards or downwards as per the changes in price and keeping all other factors constant. When the other factors (except it's own price) changes, the demand curve tends to shift right or left.Such factors are:

1. Price of related commodities
2. Income of the consumer
3. Tastes and preferences of consumers
4. Consumer's expectations

Let's discuss how the above factors causes demand curve to shift through the below example:

Let us consider the demand for commodity X:

These new data are plotted in Figure 4 as demand curve D'D' along with the original demand curve DD. We say that the demand curve for X has shifted [in this case it has shifted to the right]. The shift from DD to D'D' indicates an increase in the desire to purchase'X' at each possible price. For example, at the price of ₹4 per unit, 15 units are demanded when average household income is ₹20,000 per month. When the average household income rises to ₹25,000 per month, 20 units of X are demanded at price ₹4. A rise in income thus shifts the demand curve to the right, whereas a fall in income will have the opposite effect of shifting the demand curve to the left.