Chapter 4

A change in the price of the good causes a movement along the demand curve. Whenever there is a movement along the demand curve, we say that there has been a "change in the quantity demanded". Take the figure on the left for an example. In this figure, the increase in price from $2 to $5 causes a decrease in the quantity demanded from 50 to 20 as illustrated by the arrow in the figure. The crucial fact to notice about this movement along the demand curve is that it has been caused by a change in the price of the product.

Changes in relevant factors other than the price of the good cause the demand curve to shift. Shifts in the demand curve are called "changes in demand". The general rule about shifts is

  • If the demand increases, the demand curve shifts rightward
  • If the demand decreases, the demand curve shifts leftward


The same rules apply to the supply curve; if supply increases, the supply curve shifts rightward and if supply decreases, the supply curve shifts leftward.

The figure on the right illustrates an increase in demand. The demand curve shifts rightward from the initial demand curve (the blue curve D1) to the new demand curve (the red curve D2).

What can cause demand to increase, as illustrated in Figure 2? Or, more generally, what causes changes in demand? There are five factors that cause demand to change. These factors are listed below and are explained on pages 71 and 72 of the text book. You MUST memorize this list or else your fate will be dire.

CHANGES IN DEMAND (SHIFTS IN THE DEMAND CURVE) ARE CAUSED BY CHANGES IN:

  1. Prices of Related Goods
    1. Substitutes
    2. Complements
  2. Income
    1. Normal Goods
    2. Inferior Goods
  3. Expected Future Prices
  4. Population
  5. Preferences

If you want to read more than the textbook about the difference between shifts in demand and movements along the demand curve as well as why these differences are crucial, you can take the "Walkman Watch" in Chapter 4 of Economics In Action and carefully study "Learning Challenges" on page 40 of the Study Guide.

A-plus Tips

You WILL want to test your grasp of this list and help prepare for your exams. To be sure you have a good understanding of the concepts, in Chapter 4 of the Study Guide work the True or False questions 7, 8, and 9; Multiple Choice questions 1, 2, 4, and 5. In the Economics in Action, check out the multiple choice questions 1 through 5 in the Multiple Choice Quiz of Chapter 4. If you have a solid mastery of the difference between a movement along the demand curve and a shift in the demand curve, you should not miss True or False questions 7 and 8 and Multiple Choice question 4. Of the remaining 9 questions, you should be able to get at least 7 correct.

Would you like to study another chapter or study supply?