💰 Changes in income
If people's incomes rise, they can afford more of most goods, so demand for them increases. If incomes fall, demand for most goods decreases.
Demand » Movements Along and Shifts of the Demand Curve
What you'll learn this session
Study time: 30 minutes
Cambridge spec: 2.2.2, 2.2.3
- Tell the difference between a movement along the demand curve and a shift of the whole curve
- Use the correct words: extension and contraction, increase and decrease
- Explain the causes of a shift: income, other prices, tastes, advertising, population and more
- Describe how to draw each diagram in the exam
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Unlock This CourseTwo different things can happen to demand
Last lesson you drew a demand curve. A curve is a picture of buying plans over a given period, such as one day. But buying plans change, and economists need two different ways to describe the change. A kiosk in the made-up country of Tarmoon sells bottled juice. Here is its demand schedule on an ordinary day.
| Price per bottle ($) | Quantity demanded per day |
|---|---|
| 5 | 20 |
| 4 | 40 |
| 3 | 60 |
| 2 | 80 |
| 1 | 100 |
The kiosk owner might see two very different things happen:
- She cuts the price from $4 to $3, and sales go from 40 to 60 bottles.
- A heatwave arrives. At the same $3 price, she now sells 90 bottles.
In the first case, buyers have reacted to a new price. In the second, something else has changed their buying plans. These are not the same thing, and the exam expects you to name them correctly.
Key terms:
- Extension in demand: a rise in the quantity demanded caused by a fall in the good's own price. It is a movement down along the demand curve.
- Contraction in demand: a fall in the quantity demanded caused by a rise in the good's own price. It is a movement up along the demand curve.
- Increase in demand: more is demanded at every price, caused by something other than the good's own price. The whole demand curve shifts to the right.
- Decrease in demand: less is demanded at every price, caused by something other than the good's own price. The whole demand curve shifts to the left.
Movements along the curve: extension and contraction
A lower price on this kiosk's drinks means an extension of demand: a move along the curve
There is only one cause of an extension or a contraction: a change in the price of the good itself. Nothing else moves you along the curve.
Back to the kiosk. When the price falls from $4 to $3, the quantity demanded rises from 40 to 60. That is an extension. If the price rises from $3 back to $4, the quantity demanded falls from 60 to 40. That is a contraction.
In the exam, to draw a movement along a demand curve:
- Label the vertical axis Price and the horizontal axis Quantity.
- Draw a downward-sloping line and label it D.
- Mark the old price on the vertical axis, then read across to the curve and down to the quantity axis. Label them P1 and Q1.
- Mark the new price and do the same to get P2 and Q2.
- Draw an arrow along the same curve from the first point to the second. For a fall in price the arrow points down and to the right. For a rise in price it points up and to the left.
There is only one curve in this diagram. The curve itself does not move.
Shifts of the curve: increase and decrease
When something other than the good's own price changes, buyers want a different quantity at every price. That moves the whole curve.
In the exam, to draw a shift:
- Draw and label the axes and the original curve D1.
- Draw a second curve of the same shape. Label it D2.
- For an increase, D2 sits to the right of D1. It is further from the vertical axis, because more is bought at each price.
- For a decrease, D2 sits to the left of D1, because less is bought at each price.
- Add a small arrow between the curves to show the direction of the shift.
Back at the kiosk, the heatwave pushes the curve to the right. At $3 the quantity demanded rises from 60 to 90 bottles, and more is bought at every other price too.
What causes a shift?
A health campaign changes tastes, shifting the whole demand curve for green tea
🔄 Prices of substitutes
Substitutes are goods that can be used in place of each other, such as tea and coffee. If the price of coffee rises, some buyers switch to tea. The demand for tea increases.
🤝 Prices of complements
Complements are goods that are used together, such as printers and ink. If the price of printers rises, fewer printers are bought, so the demand for ink decreases.
👗 Tastes and fashion
If a good becomes fashionable, demand for it increases. If it goes out of fashion, demand decreases.
📢 Advertising
A successful advertising campaign can change tastes and make more people want a good. Demand increases.
👥 Population size and age structure
More people means more buyers, so demand rises. The ages of the population matter too. A country with many older people has a greater demand for healthcare, and a country with many young people has a greater demand for school books.
Other influences can also shift the curve. The weather is a good example: warm weather increases the demand for ice cream and cold drinks, and cold weather increases the demand for coats and heaters.
The vocabulary trap
Many students lose marks by mixing up the four words. Use this table.
| What happens | Cause | Name | On the diagram |
|---|---|---|---|
| Quantity demanded rises | The good's own price falls | Extension | Move down along the same curve |
| Quantity demanded falls | The good's own price rises | Contraction | Move up along the same curve |
| Demand rises at every price | Income, other prices, tastes, advertising, population, weather | Increase | Curve shifts right |
| Demand falls at every price | Income, other prices, tastes, advertising, population, weather | Decrease | Curve shifts left |
Worked example
A made-up burger chain in Kessar sells burgers for $6. News spreads that burgers are bad for health, and fewer people want them at every price. Step 1: the cause is a change in tastes, not the price of burgers. Step 2: so this is a shift, not a movement. Step 3: less is wanted at every price, so it is a decrease in demand, and D1 shifts left to D2.
Common mistakes
1. Saying a price cut causes an "increase in demand". It causes an extension in demand. 2. Shifting the curve when only the good's own price has changed. 3. Forgetting to label the axes or the curves D1 and D2. 4. Mixing up substitutes and complements. Test it: if the price of A rises, does demand for B go up (substitute) or down (complement)?
Exam-style question
In the made-up country of Dovrin, many people drink green tea. A health campaign says that green tea is good for the heart. At the same time, the price of coffee, a substitute, rises. The price of green tea itself stays the same.
(a) State two factors, other than the price of green tea, that can change the demand for green tea. [2 marks]
(b) Explain why the rise in the price of coffee may increase the demand for green tea. [3 marks]
(c) Analyse, using a demand diagram, the effect of the health campaign on the demand for green tea. [5 marks]
Model answer
(a) Any two from: income (1); prices of substitutes or complements (1); tastes and fashion (1); advertising (1); population size and age structure (1); weather (1).
(b) Coffee is a substitute for green tea (1). When coffee becomes dearer, some buyers switch from coffee to green tea (1). So more green tea is demanded at every price (1).
(c) The campaign changes tastes, so more people want green tea (1). The price of green tea has not changed, so this is a shift of the curve, not a movement along it (1). Draw Price on the vertical axis and Quantity on the horizontal axis, with a downward-sloping curve D1 (1). Draw D2 to the right of D1 (1). This is an increase in demand: more is bought at every price (1).
Exam tip
In part (c), the price of green tea does not change. Say so clearly, then draw a new curve D2 to the right of D1. If you draw an arrow along D1, you lose marks.