Meant to be read AFTER Part II

Explorations in Economic Demand, Part III

Shifts in the Demand Curve

by Kim Sosin

INCOME

Bob managed to increase his income by working a few extra hours. How would this affect the quantity of jeans he purchased, given the other things that determine his demand? As we figured out in Part I, with a higher income the number of pairs he'd buy will RISE at the current price (Pe). This is shown as point "A" on the diagram, where more Q is demanded at the same price, (Pe). Now consider what might happen if we started at some prices other than Pe. What effect would an increase in income have if the price were lower than Pe (but constant at that lower level)? Bob would also buy more jeans in that case, so the point of purchase would again be to the right of the demand curve D at that lower price. And if the price were constant but higher than Pe, Bob would increase his purchases of blue jeans at that price if his income rises. In other words, at higher incomes for the buyers in this market, the whole demand curve would lie to the right of the original demand curve. This we call a "shift in demand" caused by an increase in the income level. It is shown in the next diagram. According to this diagram, what happens to the equilibruim price P and quantity Q when the income rises? Yep, more folks want the product so the price will go up! Sellers will provide more, too, at higher prices, so the equilibruim quantity purchased (and sold) rises.


Now we can see the special role of prices in the diagram: we always show the relationship between prices and quantity demanded of a good or service on a single demand curve, e.g. D1. But the position of the demand curve, how many pairs Bob and everyone else buys at each price, depends on the level of the non-price determinants such as their income levels. When price changes and other demand determinants are constant, the outcome is given by an equilibruim on the same demand curve D1 (for example, imagine the supply curve shifting and demand curve constant). We call this change on one curve a "change in quantity demanded." If a non-price determinant changes in such a way as to increase demand, this is a "shift in" or just "change in" the demand curve such as from D1 to D2. This also provides a nice framework for us to figure out what happens to price and quantity purchased when any of the non-price determinants changes! What if Bob's tastes change, and he decides he actually prefers baggy shorts? At each price, he buys fewer pairs of jeans, so his demand curve "shifts" to the left rather than the right. If lots of consumers have the same change in their clothing tastes, the market demand curve shifts to the left, the price falls, and the equilibruim quantity purchased/sold falls.

In Part I, we discussed how each of the price and non-price determinants will affect Bob's decision. In Part II, we developed the most important graphical tool in all of economic analysis: the demand and supply diagram. In this section, Part III, we put Part I and II together to see how non-price determinants affect--cause a shift in--demand curves. At this point, either tackle the supply curve or go to the self-quiz and practice your understanding of demand concepts on the first two questions (other questions might involve supply analysis also.) The self-quiz requires a browser that can handle frames.


I now have the supply lesson online. All comments and questions are welcome!

Maintained by Kim Sosin. Comment via EMail: ksosin at mail.unomaha.edu

Kim Sosin
Co-Director, UNO Center for Economic Education
Chair, Department of Economics
College of Business Administration
University of Nebraska at Omaha
Omaha, NE 68182