A demand curve is a graphical representation of the relationship between the demands for a particular product and changes its price. The law of demand states that assuming all else being equal, increases in price results in a decrease in demand. Conversely, a decrease in price results in an increase in demand. However, price is not the only factor influencing demand.
Demand shifters are variables that specifically cause leftward or rightward shifts in the demand curve. It is important to stress the fact that demand shifters are non-price determinants of demand. They cause the demand to change even if prices remain the same. Note that these demand shifters are also factors that influence the quantity demanded for a particular product.
Understanding Shifters of Demands and their Effects
Examples of Demand Shifters
There are several factors or more specifically, non-price determinants that can affect demand and cause the demand curve to shift in a certain direction. The most common examples of these demand shifters are tastes or preferences, number of consumers, price of related good, income, and expectations.
1. Tastes or Preferences: Markets are shaped by individual and collective tastes and preferences. Of course, there are specific factors that direct these tastes and preferences including cultural norms and information or knowledge about a product as influenced by marketing strategies. Nonetheless, tastes and preferences affect the desirability of a product.
2. Number of Consumers: The number of consumers or the size of the market has a direct effect on demand. The arrival of new consumers in an established market results in an increase in demand for a particular product. However, demand decreases when market shrinks due to factors such as migration or human movement, socioeconomic composition, product substitution or other types of market disruption, and obsolescence, among others.
3. Consumer Income: For most products or normal goods, there is a direct and positive relationship between the income of a consumer and the amount of the product he or she is willing and able to buy. An increase in income generally results in an increase in demand for these normal goods. However, demand for some products or so-called inferior goods decreases with an increase in income as consumers. There is an inverse relationship between income and an inferior good. Note that this demand shifter is also related to the income elasticity of demand.
4. Price of Complements: Note that there are two types of related products: complements and substitutes. Complements are those products bought and consumed together. Examples include milk and cereals or smartphones and mobile accessories. When the price of milk goes up, demand for cereals might decrease to retain the demanded quantity of milk. In other words, when two products complement each other, there is an inverse relationship between the price of one product and the demand for the other product.
5. Price of Substitutes: Another type of related products are called substitutes. Unlike complements, substitutes are those products that are not bought or consumed together. Examples include Coke and Pepsi or an Apple iPhone and a Samsung Galaxy smartphone. When the price of Coke goes up, demand for Pepsi might increase as it becomes more attractive or economical for consumers. Hence, when two products are substitutes, there is a positive relationship between the price of one good and the demand for the other good.
6. Expectations: Expectations involving future market trends as influenced available market information can affect the demand for a particular product. For example, an announced release date of a new generation of an iPhone would decrease the demand for older and current generations of iPhone. Consumers are essentially waiting for what they expect to happen in the future. Another example is a scheduled oil price hike. Consumers would flock to nearby gas stations to fill up their vehicles while the prices are lower than the expected future prices. Hence, demand for current supply of gas increases. In this regard, consumers are responding based on what they expect to happen in the future
The Effects of Demand Shifters
The aforementioned examples of demand shifters explain the tendency of the demand curve to shift toward the left or the right. In a nutshell, a leftward or rightward shift in the demand curve takes place when there is a change in any non-price determinant of demand, thus resulting in a new demand curve. Note that similar to demand shifters, supply shifters are also non-price determinants affecting the quantity of supply. These non-price determinants causes a change in the quantity supplied even if the price remains the same.