Answer to Question #199478 in Economics for Usama

Question

 Does a change in consumers’ tastes lead to a movement along the demand curve or to a shift in the demand curve? Does a change in price lead to a movement along the demand curve or to a shift in the demand curve? Explain your answers.

Answer 1

Market pricing is a multidimensional process where the exchange of goods is influenced not only by prices but also by other, non-price factors. The amount of goods that can be bought at any given moment depends not only on the price but also on the so-called “non-price factors”. Their influence, as it were, neutralizes the influence of prices; in any case, changes in the quantity of purchased goods occur at unchanged prices, and often regardless of their movement. These factors include, first, the cash income of buyers. For example, if the cash incomes of buyers have increased, then the number of purchased goods will increase, although the prices of these goods have not changed and before the increase in incomes could be one of the main reasons for their limited purchases by consumers. If, on the contrary, the cash incomes of buyers have decreased, then at the same prices of goods, the possible volume of purchases will decrease.

Secondly, changes in the amount of purchase and sale of goods at the same prices can occur under the influence of the factor of the so-called "consumer expectations". The reasons for changing expectations can be very different: both economic (inflation) and non-economic (for example, weather, pre-holiday, seasonal conditions). Under their influence, the number of purchases can both increase and decrease, regardless of the price level of the purchased goods.

Third, the volume of many goods that consumers buy, regardless of price, can change, for example, due to the presence or absence of interchangeable and complementary goods in the markets. Thus, the demand for beef can increase if there are no other types of meat products (pork, lamb, poultry). Conversely, a large selection of meat assortments will disperse demand in accordance with the preferences of buyers, reducing it for each individual group of this product. Complementary consumer goods include, for example, sugar and other sweets in addition to beverages such as tea or coffee. The lack of sugar can cause a drop in demand for tea and coffee, since many people will not agree to consume them unsweetened, despite the specific health benefits. Almost every product has its own "complements" and "substitutes", and their presence in the commodity markets can significantly change consumer demand.

Fourth, consumer demand can be influenced by such non-price factors as subjective preferences and tastes of consumers, their attitude to fashion, and product design. Competition of buyers can play a significant role, as well as the specifics of buying psychology (for example, the crowd effect: many will rush to buy the product that everyone buys for some reason, etc.).