SHIFT IN DEMAND CURVES

SHIFT IN DEMAND CURVESLAW OF DEMAND

30-Aug-14SYMBIOSIS INSTITUTE OF INTERNATIONAL BUSINESS

Submitted By:Bhavya Kapoor14020241025IB Div-A2014-16

The assignment explains the shift in demand curves due to change in the Ceteris Paribus factors. It analyses the effect of factors other than price on the consumer demand.

SHIFT IN DEMAND CURVE: Demand curve is the relationship between the quantity demanded of a product and its price holding constant all other factors. As the price increases, the lower the quantity demanded and vice versa. But the quantity of a product demanded by an individual depends on a number of factors other than price. When a factor other than price changes, there is a shift in the demand curve. The shift in the demand curve is happens in two ways: The Demand Curve shifts rightwards When there is an increase in demand due to the change in the ceteris paribus factors, the demand curve shifts to the right. When the demand curve shifts to the right, the quantity demanded increases without any change in price.

The Demand Curve shifts leftwards When there is an increase in demand due to the change in the ceteris paribus factors, the demand curve shifts to the left. When the demand curve shifts to the left, the quantity demanded decreases without any change in price.

Factors affecting the quantity demanded are: 1) Income a. Inferior goods b. Normal goods 2) Price of Related Products a. Price of substitute goods b. Price of goods complement 3) Tastes and preferences 4) Number of users 5) Expectations of a change in price 6) Season 7) Trend 8) Employment Explanation of factors: 1) Income: The demand for goods depends on the income of the consumers. The income effect on demand can be divided by two types of goods. a. Normal products: These are goods whose demand increases with the increase in consumer incomes. These are the necessary goods such as education, travel, fruits, TV, etc. The price elasticity of normal goods is positive and less than 1. For example demand of a color TV increases with rising income of a consumer.

b. Inferior goods These are goods whose demand decreases with the increase in consumer incomes. These are products such as public transport, potatoes and similar products of cheap food. For example: If the income from increased consumption, which shifts from buying black and white television to color television.

2) Price of related goods The demand for goods also depends on the price of related goods. The related goods may be classified as: Substitute Products Complimentary Products. a. Price of Substitute Goods: Substitute goods are those goods that can be used in place of others to satisfy a particular desire, such as tea and coffee. The demand for a particular commodity varies directly with the price of a substitute good. For example, if the price of substitute good (e.g. coffee) increases, then the demand for a particular product (e.g., tea) will rise as the tea is relatively cheaper compared to coffee.

As shown in the diagram given price of coffee (good substitute) shown in the Y axis and the demand for tea (given product) on the X axis when the price of coffee rises from OP to OP1, demand for tea also rises from OQ to OQ1. Increase in the price of Substitute Goods: When the price of substitute goods (e.g., coffee) increases, the demand for a given (e.g., tea) product also rises from OQ to OQ1 in the same price OP. This leads to a rightward shift in the demand curve DD given product for D1D1.

Fall in Prices of Substitute Goods: With the decline in the price of substitute goods (coffee), the demand for a given product (tea) also decreases from OQ1 to OQ for the same price OP. The demand curve for a given price shifts left from DD to D1D1.

b. Price of Complementary GoodsComplementary goods are goods that are used together to meet a particular need. The demand for a particular commodity varies inversely with the price of a complementary good. For example, if the price of a complementary good (e.g. sugar) increases, then the demand for a particular product (e.g. tea) will be reduced, as it will be relatively more expensive to use both together.

As shown in the diagram given sugar price (complementary good) is displayed on the Y axis and the demand for tea (given product) on the X axis when the price of sugar rises from OP to OP1, demand for tea falls from OQ to OQ1. Increase in the Price of Complementary Goods: When the price of complementary goods (eg sugar) rises, the demand for a given (eg, tea) product falls to OQ1 from OQ for the same price OP. As a result, the demand curve shifts leftwards from DD to D1D1.

Decrease in the Price of Complementary Goods: With the decline in the price of complementary goods (sugar), the demand for a given product (tea) increases from OQ to OQ1 at the same price OP. As a result, the demand curve for a given product moves to the right from DD to D1D1. Cross Demand:Cross demand refers to the relationship between the demand for a given product, and the price of related products, other things remaining the same. Cross Demand indicates how much is the quantity demanded of a given product at different prices of a related (substitute or complementary) product.

Cross Demand can be either Positive or Negative: A) Cross Demand is positive in the case of substitute goods because the demand for a given product varies directly with the price of substitute goods. B) Cross Demand is negative in the case of complementary goods because the demand for a given product is inversely proportional to the price of complementary goods. 3) Consumer Tastes and Preferences This is a less tangible item that can still have an impact on demand. There are all kinds of things that can change the tastes and preferences that make people want to buy more or less of a product. For example, if a celebrity endorses a product, this may increase the demand for a product. On the other hand, if a new health study comes out saying that something is bad for your health; this may decrease the demand for the product. 4) Number of Consumers As consumers enter or leave the market this has a direct effect on the amount of a product that consumers (in general) are willing and able to buy. For example, a pizza shop located near the University will have more demand and thus higher sales during the fall and spring semesters. In the summers, when fewer students take classes, the demand for the product will decrease because the number of consumers in the area has decreased significantly. Also the increase in population in one area may cause an increase in demand for a product and vice versa. 5) Expectations for Price Change The expectations of consumers for the future may also affect the quantity of a product that one is willing and able to buy. For example, if you hear that Apple will soon introduce a new iPod that has more memory and longer battery life, you (and other consumers) may decide to wait to buy an iPod until the new product comes out. When people decide to wait, you are decreasing the current demand for iPods, because of what they expect to happen in the future. Similarly, if you expect the price of gasoline to go up tomorrow, you fill your car with gas now. So it will increase gas demanded today because of what you expect to happen tomorrow. This is similar to what happened after Hurricane Katrina in the fall of 2005, rumors began gas stations have run out of gas. As a result, many consumers decided to fill their cars (and gas cans), causing long lines and a large increase in demand for gas. All this is based on the expectation of what would happen. 6) Season The demand for goods also depends on the season. The consumer demand for a product increases for a specific season and decreases for others. For example, demand for sweaters increases during winters. Similarly, the demand for cold drinks increases during the summer season. 7) TrendThe trend in the market also leads to shifts in demand. For certain products, the consumer wants to buy the product just because others are buying, neglecting their own choices and preferences. This is known as "Bandwagon effect". So the trend in the market causes an increase in product demand. For example, people could buy a new electronic device, due to its popularity, no matter if they need, can afford, or even really want. 8) Employment The increase or decrease in employment rates can affect the demand curve. For example, if a company offers a discretionary product and unemployment rate increases, there may be less demand for their products, which would cause the demand curve to shift. If the unemployment rate falls and more people have disposable income, the general population may be more likely to spend on discretionary items, which may include vacation packages and expensive clothes.SHIFT IN DEMAND CURVES