Shift in Demand Curve
When Demand Changes But Price Remains the Price
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.
A shift in the demand curve is the unusual circumstance when the opposite occurs. Price remains the same but at least one of the other five determinants change. Those determinants are:
- 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 versus chicken. They can also be complementary, such as beef and Worcestershire sauce.
- The number of potential buyers. This determinant applies to aggregate demand only.
Factors That Cause a Demand Curve to Shift
When the demand curve shifts, it changes the amount purchased at every price point. 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.
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. That happens during a recession when buyers' incomes drop. They will buy less of everything, even though the price is the same.
The curve shifts to the right if the determinant causes demand to increase. This means more of the good or service are demanded at every price. When the economy is booming, buyers' incomes will rise. They'll buy more of everything, even though the price hasn't changed.
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 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 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. 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.