Note on Change In Demand and Reason Behind Downward Slopping Demand Curve

  • Note
  • Things to remember

CHANGEIN DEMAND


Demand for goods and services changes over a long period of time. There is clear distinction between a 'change in demand' and 'change in quantity demand'. A change in demand is involved when the entire demand curves shift. An increase in demand shifts the curve to the right and the decrease in demand shifts the curve to the left. The change in demand can be analyzed in the following ways:

MOVEMENT ALONG THE DEMAND CURVE

Movement along the demand curve can be explained as the state of increase or decrease in quantity demanded due to fall or rise in the price, where all other factors remaining same. In other words, change in quantity demanded due to only change in price is called movement along the demand curve. Movement along the demand curve is based on the theory of the Law of Demand. It explains how the price-quantity combination moves from point to point on the same demand curve.

When the price rises, demand decreases, then the equilibrium points move upward to the same demand curve, it is known as a contraction in demand. Likewise, when the price falls, demand increases then the equilibrium point moves downward to the same demand curve, it is known as an extension in demand. Thus, the contraction or extension in demand due to the change in price is known as movement along the demand curve.

Movement along the demand curve can be explained more with the help of diagram below:

In the above figure, the X-axis shows quantity demanded (Q)and the Y-axis shows a price of a commodity (P). The demand curve DD is sloping downward from left to right. In this demand curve, the initial equilibrium point is 'E', where initial price is OP and quantity demanded is OQ. When the price falls to OP1 from OP, the quantity demanded increases from OQ to OQ2. Then, the equilibrium point E moves to E2. This condition is known as an contraction in demand. Likewise, when the price rises from OP to OP2, the quantity demand decreases from OQ to OQ1 and the equilibrium point E moves to E1. This condition is known as a extension in demand. The movement of equilibrium point from E to E2 and E to E1 due to the change in price shows the movement along the demand curve.

SHIFT IN DEMAND CURVE

The change in demand due to the non-price factor is known as a shift in the demand curve. Examples like a taste, preference, income, etc. Thus, the change in demanded due to the determinants except its price is called a shift in the demand curve. The curve shifts from its original place in case of a shift in the demand curve. Shift in demand curve can be analyzed under two conditions:

  1. Increase in Demand

The causes of increase in demand are:

  • Increase in consumer’s income
  • Increase in size of population
  • Increase in taste and preference
  • Increase in price of substitution goods
  • Increase in advertisement expenditure

  1. Decrease in demand

The causes of decrease in demand are:

  • Decrease in consumer’s income
  • Decrease in size of population
  • Decrease in taste and preference
  • Decrease in price of complementary goods
  • Use of old technology

The following diagram shows the shift in the demand curve.

In the above figure, a certain price level is fixed which is kept constant for every demand. In the demand curve, the initial demand curve is denoted by DD and when the determinants of demand increases, the demand curve shift to the right D2D2. Likewise, when demand decreases the demand curve shift to left D1D1.

FACTOR CAUSING THE SHIFT IN DEMAND CURVE

The major factors causing the shift in demand curve are as follows:

  1. Income of the consumer

The demand of the commodity changes along with the change in income of the consumer. If there is an increase in income of the consumer, demand for normal goods also increases and the demand curve shifts towards the right.

  1. Size of the population

When the size of the population increases, the demand for the commodity also increases and the demand curve shifts toward the right. But, if the population decreases, the demand curve shift toward left as the demand decreases.

  1. Consumers taste and preference

If the consumers taste and preference increases towards any commodity, then it increases demand for that product. The increase in demand shifts the demand curve towards the right.

  1. Change in money supply

If the central bank increases the quantity of supply of the money in the economy, then there will be inflation. It increases the purchasing power of the people resulting in buying more goods and services without a change in price. In this condition, the demand curves shifts.

  1. Distribution of national income

The aggregate demand for a product depends on the distribution of national income. If the national income is distributed more equally in the country, it increases the demand and the demand curve shift upward. On the other hand, if taxes are levied to reduce the demand, the aggregate demand will fall without any change in price. It shifts the demand curve downward.

  1. Change in technology

The progress of new technology replaces the old technology which reduces the demand for old technology without the change in price. The increment in demand for the new technology shifts the demand curve upward.

REASONS BEHIND DOWNWARD SLOPING DEMAND CURVE

As we know there is an inverse relationship between price and quantity demanded, the demand curve always slopes downward to the right. Reasons behind downward sloping downward is as follow:

  1. Income Effect

Real income is different from money income. How much goods can be purchased by money income is called real income. The real income of the consumer or worker depends upon the price of goods in the market. It there is a decrease in the price of the commodity, it increases the real income of the consumers. The consumer can purchase more goods if the price is low. It justifies that price and demand are inversely related and hence, demand curve slopes downward.

  1. Substitution Effects

In our daily life, we use various types of goods and services in which some are complementary and some substitute. When the price of a commodity fall, it becomes relatively cheaper than its substitute goods. When the price of a commodity is low, then consumer prefers to have low price commodity than the substitute goods. So, the demand curve slopes downward.

  1. Entry of New Consumers

When the price of a commodity decreases in the market then the more people tend to buy that product for which new consumer enters in the market. It increases the demand for the commodity in the market. So, fall in price increases overall demand and hence, demand curve slopes downward.

  1. Law of Diminishing Marginal Utility

The law of diminishing marginal utility explains that as consumers consume various units of a commodity at a time, the level of satisfaction decline with every increase in units of consumption in given period. Hence, there is an inverse relation between price and demand.

  1. Additional Uses

There are some particular goods which have several uses like electricity, water, potato, etc. If a price of such goods falls, then consumers demand it more and if price increases, consumer declines it uses and the demand decreases automatically. In this situation, demand curve slopes downward.

(Karna, Khanal and Chaulagain)(Khanal, Khatiwada and Thapa)(Jha, Bhusal and Bista)

Bibliography

Jha, P.K., et al. Economics II. Kalimati, Kathmandu: Dreamland Publication, 2011.

Karna, Dr.Surendra Labh, Bhawani Prasad Khanal and Neelam Prasad Chaulagain. Economics. Kathmandu: Jupiter Publisher and Distributors Pvt. Ltd, 2070.

Khanal, Dr. Rajesh Keshar, et al. Economics II. Kathmandu: Januka Publication Pvt. Ltd., 2013.

  • Reason behind sloping demandcurve downward
  1. Income effects
  2. Substitute effects
  3. Entry of new consumers
  4. Law of diminishing marginal utility
  5. Additional uses
  • Changes in demand can be analyzed in two ways
  1.  Movement along the demand curve
  2. Shift in demand curve
.

Very Short Questions

0%

DISCUSSIONS ABOUT THIS NOTE

You must login to reply

Forum Time Replies Report
Manjil rai

Why does demand increase when price of commodity falls?


You must login to reply