Answer to Question #131192 in Microeconomics for ibrahim rehmani

Question

What happens to a given demand curve if one of the determinants of demand change? Provide an example for demand and illustrate the examples by drawing correctly labeled graphs.

Answer 1

A change in a determinant of demand results in a shift in demand curve. The only exception is a change in own price - a change in own price of a good results in a movement along a demand curve, not a shift.

Let us take an example of a normal good, meat, and a determinant of demand, disposable income. A positive change in the determinant of demand, in this case an increase in disposable income, results in an increase in demand. However, a negative change in a determinant of demand, in this case a decrease in disposable income, results in a decrease in demand. The diagram below illustrates these movements, assuming the market of meat.

As shown in the graph above, an increase in disposable income results in an increase in demand. This is indicated by an upward and rightward shift in demand curve shown by a shift from the original demand curve D0 to the demand curve D1. However, a decrease in disposable income results in a fall in demand as indicated by a downward and leftward shift in demand as indicated by a shift from the original demand curve D0 to D2.

However, if the factor is own price, an increase in own price results in a movement up the demand curve (contraction in demand) whereas an decrease in price causes a movement down the demand curve (contraction in demand). This is shown below.

As shown on the graph above, an increase in price from P2 to P1 results in a movement up the demand curve; quantity demanded falls from Q2 to Q1. However, a decrease in price from P1 to P2 results in a movement down the demand curve from a to b; quantity demanded increases from Q1 to Q2.

Thus, a change in own price of meat causes a movement along a demand curve; the demand curve do not change. However, a change in any other factor affecting demand results in a shift in demand curve.