Why does a demand curve shifts

A change in demand means that the entire demand curve shifts either left or right. The initial demand curve D 0 shifts to become either D 1 or D 2. This could be caused by a shift in tastes, changes in population, changes in income, prices of substitute or complement goods, or changes future expectations. A change in quantity demanded refers to a movement along the demand curve, which is caused only by a change in price. Figure 2. Change in Quantity Demanded. A change in the quantity demanded refers to movement along the existing demand curve, D 0.

This is a change in price, which is caused by a shift in the supply curve. Similarly, a change in supply refers to a shift in the entire supply curve, which is caused by shifters such as taxes, production costs, and technology.

Just like with demand, this means that the entire supply curve moves left or right:. Figure 3. Change in Supply. A change in supply means that the entire supply curve shifts either left or right.

According to laissez-faire economics, the economy is at its strongest when the government protects individuals' rights but otherwise doesn't intervene. What Is Adverse Selection? Adverse selection is a term that describes the presence of unequal information between buyers and sellers, distorting the market and creating conditions that can lead to an economic collapse. It develops Explaining The K-Shaped Economic Recovery from Covid A K-shaped recovery exists post-recession where various segments of the economy recover at their own rates or levels, as opposed to a uniform recovery where each industry takes the same Both on paper and in real life, there is a solid relationship between economics, public choice, and politics.

The economy is one of the major political arenas after all. Many have filed for bankruptcy, with an Imagine that you're a poor student right now but soon you'll graduate and get a high paying job. When you get that high-paying job, when your income goes up, you're probably going to demand more automobiles, more housing, and more fine dining. These are all called Normal Goods because the demand for them goes up when incomes go up.

And of course the demand for them goes down when incomes go down. There are also goods however, for which when your income goes up your demand for them actually goes down. Again, when I was a poor student for instance, I actually sometimes went to McDonald's to buy a cheeseburger because it was cheap. When my income went up later, I ate at McDonald's less often and ate at better restaurants, which of course cost more.

I haven't actually eaten at McDonald's for many years. An inferior good is one which when your income goes up the demand for it goes down and vice versa. For instance, think about soup. Soup is a cheap and easy meal. So during a recession, the demand for soup may well go up. During boom times, the demand for soup may well go down. Now, let's test your knowledge.

I suggest you get a pencil and also a piece of paper. Put down two demand curves. Now we're going to think about the demand for hamburger helper and we're going to think about it in two different situations, namely, during a boom and during a recession.

Here's our demand for hamburger helper. What is going to happen to this demand when the economy goes into a boom? When people's incomes go up? Now, draw the new demand curve. What's that new demand curve going to look like? In a boom, the demand for hamburger helper is going to decrease because hamburger helper is an inferior good so we get a decrease in demand.

What about in a recession? Of course in a recession, we get the opposite. In a recession, when incomes are going down the demand for hamburger helper is going up. Here's another demand shifter, namely population. As the population of an economy changes, the number of potential buyers of a particular good also changes. For instance, what happens to the demand for diapers in Russia as birth rates drop? Well, that demand is going to decrease.

In the United States, as you probably know, the baby boomers are getting older, so we're having many more elderly individuals in the population. Which products will increase in demand as the American population gets older? Well, think about that for a moment.

Here are a few possible examples. As the number of elderly in the United States goes up, we would expect an increase in the demand for cancer drugs, for instance. Indeed as the population has gotten older, pharmaceutical firms have invested more in research and development for producing drugs for elder people.

We expect also as people get older, the demand for retirement communities goes up, perhaps even the demand for golf. How would we do this on the demand curve? Well, use an old demand curve but as the population gets older the demand for these products - cancer drugs, retirement communities and golf equipment, well that goes up, so this curve shifts away from the origin and up to the right.

Here's another demand shifter - the price of substitutes. Two goods are substitutes if an increase in the price of one good leads to an increase in demand for the other good as well.

For example, suppose that the price of Nike shoes goes up. Well, that is going to increase the demand for Reebok shoes and vice versa. Suppose instead that the price of Nike shoes goes down, that is going to decrease the demand for Reeboks as people switch from Reeboks to the now cheaper good, Nike. Another example. What happens to the demand for iTunes if songs on Spotify, a competitor, become cheaper? If Spotify is cheaper, that's going to decrease the demand for iTunes.

Another important demand shifter is the price of complements. Complements are goods which tend to go together well. Think for instance if hotdogs and hotdog buns. Technically, two goods are complements if an increase in the price of one of those goods leads to a decrease in the demand for the other. Suppose for instance, that the price of hotdogs goes up. That means fewer people are going to buy hotdogs.

That means that demand for hotdog buns is going to decrease as well and vice versa of course. Again, if the price of hotdog buns goes down, people are going to want to buy more buns. But then they're also going to want to buy more of the complement of hotdogs. So the demand for hot dogs will go up when the price of the complement hotdog buns goes down. Here's another example. What happens to the demand for sport utility vehicles when gasoline gets more expensive? Cars and gasoline or sport utility vehicles and gasoline, they're complements.

When you want one, you also want the other. So if gasoline gets more expensive, that is going to decrease the demand for sport utility vehicles. Another important demand shifter is expectations. It can be expectations of events or of prices. In particular, if people expect the price of a good to be higher in the future, that is going to tend to increase demand today.

Consumers will adjust their current spending in anticipation of what is going to happen to future prices in order to obtain the lowest possible price by buying more today. For example, imagine you hear there's going to be a hurricane. If the hurricane hits, you expect the price of batteries is going to go way up or perhaps it's going to be very difficult to even get any batteries at all.

That's going to increase the demand for batteries today. Something in the future, that is this expectation of a future event can change the demand today. Similarly, if people expect that the price of the Xbox is going to drop right before Christmas, well then sales in November will go down. Apple has to deal with this problem all of the time. Each time people expect a new iPhone model, they stop buying the current version of the iPhone. So Apple doesn't want anyone to know when a new iPhone is going to be coming out because otherwise in the meantime, the sales of the current product will drop.

Taste is an important demand shifter and tastes change all the time. Tastes differ among consumers and they also differ over time because of seasonal changes or fashion or fads. For instance, what happens to the demand for boots in October? What happens to the demand for swimsuits in June? What happens to the demand for sunscreen during the summer? What happens when everyone thinks that the Atkins diet is going to cause them to lose weight? Let's take a closer look at that one.

The Atkins diet, if you recall, was a diet which said that carbohydrates make you fat so the way to lose weight was to consume more protein, more red meat in particular.