Question

Various factors cause a demand curve to shift. List four different factors and explain them fully as determinants of demand.

Answer 1

Before coming to the factors that cause a demand curve to shift.

Let's understand two things

1. Change in quantity demanded
2. Change in demand

Change in quantity demanded refers to a movement along the demand curve because of change in its own price of a good. There are two things in this contraction and expansion in demand.

Change in demand refers to a shift in demand curve due to change in factors other than its own price of a good. There are two things in this increase or decrease in demand.

Factors like

• Change in price of substitute goods
• Change in price of Complementary goods
• Change in the income of consumers  
• Expectation of change in price in future
• Change in tastes and preferences

Change in price of substitutes goods

Substitute goods are those goods that can be used in place of one another, for example, tea and coffee, Coke and Pepsi, etc. Demand in this varies directly with the price of a substitute good if the price of substitute good decrease then the demand for a good will decrease which will shift the demand curve to the left as people will demand less for the same price because they will switch to substitute good and vice - versa.

Change in price of Complementary goods

Complementary goods are those goods which are used together to satisfy a particular want, for example, tea and sugar, car and diesel, etc Demand in this varies indirectly with the price of a complementary good. If the price of complementary good increases then demand of good will decrease because people are dependent on both hence any change in price in any of the good will affect another.

Change in the income of consumers

The income of consumers affects directly to demand of the good. If income increases the demand for goods will also increase because of an increase in the purchasing power of consumers and Vice - Versa. (In case of normal goods)

The income of consumers affects indirectly to demand of the good. If income increases the demand for goods will decrease because now people will switch to normal goods and Vice - Versa. (In case of Inferior or Giffen goods).

Expectation of change in price in future

A price of a good may increase or decrease in the future. If the consumer thinks that price will increase in the future then demand will increase in present for the same price which will shift the demand to the right and If the consumer thinks that price will decrease in the future then demand will decrease in present for the same price which will shift the demand to the left. So there is a direct relationship between the demand for good and future price.