Demand Curve Shifts

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There are many factors that can cause demand curve shifts.  Some of the more common are changes in:

  • the prices of related goods,
  • income and wealth,
  • tastes and preferences,
  • expected future prices, income, wealth, or just about anything else.

Missing from this list is the price of the product itself.  A change in the price of a product causes a movement along the demand curve (a change in quantity demanded). A change in any factor that affects demand except price causes the demand curve to shift (a change in demand).

Complements example: the iPhone fan

(click for larger image)

Here I want to focus on two factors: income and the prices of related goods.  An increase in income causes demand for most products to increase. Those products are called normal goods.  For a very few goods higher income causes demand to decrease. Those unfortunate items are called inferior goods.

Related goods are called substitutes and complements.  Fuji apples (F) and Envy apples (E) are substitutes because they can be used in place of each other.  Economists like precise definitions. We say F and E are substitutes if an increase in the price of F causes demand for E to increase.

Complements are products that are used together.  Bagels (B) and cream cheese (C) are one example because many people use them together. Again, we say B and C are complements if an increase in the price of B causes demand for D to decrease.

Words are confusing.  So here’s a video that offers a better explanation.

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About Tony Lima

Retired after teaching economics at California State Univ., East Bay (Hayward, CA). Ph.D., economics, Stanford. Also taught MBA finance at the California University of Management and Technology. Occasionally take on a consulting project if it's interesting. Other interests include wine and technology.