Shift in Demand Curve: When Price Doesn't Matter
Examples of When Demand Changes No Matter the Price
Definition: A shift in the demand curve is when a determinant of demand other than price changes. Here are these other four determinants.
- Income of the buyers.
- Consumer trends and tastes.
- Expectations of future price, supply, needs, etc.
- The price of related goods. These can be substitutes, such as beef vs. chicken. They can also be complementary, such as beef and Worcestershire sauce.
There is a fifth determinant that applies to aggregate demand only.
That is the number of potential buyers.
The demand curve plots the relationship between the quantity demanded of a good or service and its price. The curve depicts in a graphical way the demand schedule, which details exactly how many units will be bought at each price. The law of demand guides that amount. That says less is bought at a higher price ceteris paribus. That means all determinants of demand other than price must stay the same.
What Causes a Shift in the Demand Curve?
The curve shifts to the left if the determinant causes demand to drop. That means less of the good or service is demanded at every price. For example, when the economy is booming, buyers' incomes will rise. That means they'll buy more of everything, even though the price hasn't changed.
The curve shifts to the right if the determinant causes demand to increase. That means that more of the good or service are demanded at every price.
Using that same illustration, when the economy is in a recession, buyers' income drops. They will buy less of everything, even though the price is the same.
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 at every price. That shifted the demand curve to the left.
Expectations of future price: When people expect prices to rise in the future, they are more likely to buy more of a good now, even if the price hasn't even changed. In other words, they want to stock up now before prices rise. That shifts the demand curve to the right. That's why the Federal Reserve sets up an expectation of mild inflation. Its target inflation rate is 2.0 percent.
The price of related goods: If the price of beef rises, you're more likely to buy more chicken. Even if its price doesn't change. That's how an 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 as you are less likely to buy it at any price since you have less beef to put it on.
The number of potential buyers (affects aggregate demand only): When there's a flood a newly eligible consumers in a market, they will naturally buy more product at the same price, shifting the demand curve to the right.
That happened when standards were lowered for mortgages in 2005. Suddenly, people who hadn't been eligible for a home loan could get one with no money down. More people bought homes until the demand outpaced supply. At that point, prices rose in response to the shift in the demand curve.