A shift in the demand curve occurs when a determinant of demand other than price changes. It occurs when demand for goods and services changes even though the price didn't.
To understand this, you must first understand what the demand curve does. It plots the demand schedule. That is a chart that details exactly how many units will be bought at each price. It's guided by the law of demand which says people will buy fewer units as the price increases. That's as long as nothing else changes, an economic principle known as ceteris paribus. That means all determinants of demand other than price must stay the same.
Factors That Cause a Demand Curve to Shift
According to the law of demand, the quantity demanded of a good increases or decreases based on a decrease or increase in its price. A shift in the demand curve is the unusual circumstance when the price remains the same but at least one of the other five determinants of demand change. Those determinants are:
- Income of the buyers
- Consumer trends and tastes
- Expectations of future price, supply, and needs
- The price of related goods. These can be substitutes, such as beef versus chicken. They can also be complementary, such as beef and Worcestershire sauce.
- The number of potential buyers (applies to aggregate demand only)
A shift in the demand curve for an item has both short-term and long-term impact on its price and quantity demanded. For example, when incomes rise, people can buy more of everything they want. In the short-term, the price will remain the same, and the quantity sold will increase.
The same effect occurs if consumer trends or tastes change. If people switch to electric vehicles, they will buy less gas even if the price of gas remains the same.
A shift in demand curve is different from movement along the demand curve. The latter depicts changes to quantity demanded based on change in price.
Demand Curve Shifts Left
The demand curve shifts to the left if the determinant causes demand to drop. That means less of the good or service is demanded. That happens during a recession when buyers' incomes drop. They will buy less of everything, even though the price is the same.
For example, consider the following demand and supply chart for a product. If originally at price P, quantity Q was demanded, once the demand curve shifts to the left at the same price P, lower quantity Q1 will be demanded.
Over the long run, demand and supply forces adjust to arrive at a new equilibrium. If there are no changes to the supply of that item, ultimately left shift in the demand curve will force a decrease in prices and the demand and supply will intersect at an equilibrium E1. The new equilibrium would have a lower price P1, although the quality demanded (Q2) would be higher than the temporary increase at Q1 but lower than the original at Q.
Demand Curve Shifts Right
The curve shifts to the right if the determinant causes demand to increase. This means more of the good or service are demanded even though there's no change in price. When the economy is booming, buyers' incomes will rise. They'll buy more of everything, even though the price hasn't changed.
For example, consider the following demand and supply chart for a product. If originally at price P, quantity Q was demanded, once the demand curve shifts to the right at the same price P, more quantity (Q1) will be demanded.
If there are no changes to the supply of that item, ultimately a right shift in the demand curve will force an increase in prices and the demand and supply will intersect at an equilibrium E1. The new equilibrium would have a higher price P1, although the quality demanded (Q2) would be lower than the temporary increase at Q1 but higher than the original at Q.
How Demand Determinants Shift the Curve
Here are examples of how the five determinants of demand other than price can shift the demand curve.
- Income of the buyers: If you get a raise, you're more likely to buy more of both steak and chicken, even if their prices don't change. That shifts the demand curves for both to the right.
- Consumer trends: During the mad cow disease scare, consumers preferred chicken over beef. Even though the price of beef hadn't changed, the quantity demanded was lower. That shifted the demand curve to the left.
- Expectations of future price: When people expect prices to rise in the future, they will stock up now, even though the price hasn't even changed. That shifts the demand curve to the right. For this reason, the Federal Reserve sets up an expectation of mild inflation. Its target inflation rate is 2%.
- The price of related goods: If the price of beef rises, you'll buy more chicken even though its price didn't change. The increase in the price of a substitute, beef, shifts the demand curve to the right for chicken. The opposite occurs with the demand for Worcestershire sauce, a complementary product. Its demand curve will shift to the left. You are less likely to buy it, even though the price didn't change, since you have less beef to put it on.
- The number of potential buyers: This factor affects aggregate demand only. When there's a flood of new consumers in a market, they will naturally buy more product at the same price. That shifts the demand curve to the right. An example of that can be that work-from-home restrictions due to the Covid-19 pandemic made it easier for many Americans to relocate. As a result, a lot of people moved from cities to suburban areas or locations where homeownership seemed more affordable. That combined with with near-zero interest rates led to a huge demand for suburban housing.
- When there is movement only along the demand curve, this means price is the only factor that is changing
- When the entire demand curve shifts, it signals that other determinants of demand, excluding price, have changed
- Aside from price, other determinants of demand that affect the demand schedule or chart are: income, consumer tastes, expectations, price of related goods, and number of buyers.
- Shift of the demand curve to the right indicates an increase in demand at the same price because a factor, such as consumer trend or taste, has risen for it
- A shift to the left displays a decrease in demand at the same price because another factor, such as number of buyers, has slumped
Frequently Asked Questions (FAQs)
What is the difference between a movement and a shift in the demand curve?
Demand curve movement refers to changes in price that affect the quantity demanded. A demand curve shift refers to fundamental changes in the balance of supply and demand that alter the quantity demanded at the same price. For example, you may be willing to buy 10 apples at $1. If the grocery store drops the price to $0.75, then that demand curve movement means you might buy 15 apples instead of 10. If you get a raise at work, that demand curve shift may mean you're willing to buy 15 apples at $1 and 20 apples at $0.75.
Why is the demand curve downward sloping?
The demand curve slopes downward because more consumers would be willing or able to afford goods or services the closer their prices get to $0. This is the basic law of demand. As the price drops, it becomes easier to entice consumers to try a good or service. That's why coupons and free trial promotions work so well at attracting new customers.