What this lesson teaches
I can explain and draw increases and decreases in demand as shifts of the curve.
Syllabus K343, 2.2.3. Shifts of a demand curve: causes of decreases and increases in demand; diagrams that illustrate shifts of a demand curve
Make a guess
The price of mobile data plans rises sharply. What happens to the demand for smartphones?
- It increases, because people switch to buying phones.
- It stays the same, because smartphone prices did not change.
- It decreases, because data is used with smartphones.
Show the answer
It decreases, because data is used with smartphones.
Data and phones are complements. When data becomes dearer, using a phone costs more, so demand for phones falls at every price.
Changes other than the good's own price, such as income or the price of related goods, shift the demand curve.
The demand curve shifts when something other than the good's own price changes. An increase in demand shifts the curve right: more is demanded at every price. A decrease shifts it left.
Income: higher incomes usually increase demand. Prices of related goods: if a substitute, such as another brand, becomes dearer, demand for this good increases. If a complement, a good used together with it, becomes dearer, demand for this good decreases.
Tastes and fashion: advertising or a new trend can increase demand. Population: more people, or more people of a certain age, increase demand for the goods they buy.
Expectations: if buyers expect prices to rise soon, they buy more now. Government policy, such as a subsidy to buyers, can also increase demand.
Sort these
Think about the market for bubble tea. Sort each event by what it does to the demand curve.
Groups: Demand increases (shifts right), Demand decreases (shifts left), A movement along the curve.
- A popular celebrity starts a bubble tea craze online.
- Shops raise the price of a cup of bubble tea.
- Shops run a one-for-one promotion on their drinks.
- The price of coffee, a substitute, rises.
- The price of tapioca pearl toppings, a complement, rises.
- Doctors warn that sugary drinks cause diabetes.
Show the answer
Demand increases (shifts right)
- A popular celebrity starts a bubble tea craze online. A change in tastes makes buyers want more at every price.
- The price of coffee, a substitute, rises. Some coffee drinkers switch to bubble tea, so demand for it rises.
Demand decreases (shifts left)
- The price of tapioca pearl toppings, a complement, rises. Drinking bubble tea with pearls now costs more, so demand for the drink falls.
- Doctors warn that sugary drinks cause diabetes. Tastes shift away from sugary drinks, so less is wanted at every price.
A movement along the curve
- Shops raise the price of a cup of bubble tea. This is the good's own price, so quantity demanded contracts along the curve.
- Shops run a one-for-one promotion on their drinks. Lowering the good's own price extends quantity demanded along the same curve.
- Increase in demand
- Demand curve shifts right: more demanded at every price.
- Substitutes
- Goods used instead of each other; a dearer substitute raises demand.
- Complements
- Goods used together; a dearer complement lowers demand.
- Main causes of shifts
- Income, related goods' prices, tastes, population, expectations.
Worked example: Shift or movement? Smartphones and data plans
Smartphones and mobile data are complements: people use them together.
- Change: the price of mobile data plans rises.
- Classify it: this is not the price of smartphones, so it shifts the smartphone demand curve.
- Direction: using a smartphone now costs more, so demand for smartphones decreases. D shifts left.
- Contrast: if smartphone prices themselves rose, that would be a contraction along the curve.
Watch out for this
If a substitute becomes more expensive, people buy less of everything.
When a substitute becomes dearer, buyers switch to the cheaper alternative. Demand for the good increases.
Check your understanding
Household incomes rise by 10%. Which curve moves in the market for overseas holidays, a normal good?
- Neither; buyers move along demand as they can afford more.
- Demand shifts right, as more holidays are wanted at each price.
- Supply shifts right, as travel firms expect richer customers to book.
Show the answer
Demand shifts right, as more holidays are wanted at each price.
Right. Higher income raises demand for a normal good at every price, so the demand curve shifts right.
Check your understanding
Which change would decrease the demand for petrol cars?
- The price of petrol rises.
- Incomes rise.
- The price of petrol cars falls.
Show the answer
The price of petrol rises.
Yes. Petrol is a complement, so running a petrol car costs more and demand falls.
Check your understanding
Bubble tea shops raise their prices. Fruit juice is a close substitute. Which describes the effect on the fruit juice market?
- Demand for juice decreases, so the curve shifts left
- Supply of juice increases, so its price falls
- Demand for juice rises, so its curve shifts right
- Quantity demanded of juice rises along the same curve
Show the answer
Demand for juice rises, so its curve shifts right
Right. Some bubble tea drinkers switch to juice at every juice price.