Chapter 4

A change in the price of the product 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 has been caused by a change in the price of the product.

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


The same rules apply to the supply curve: If supply increases, the supply curve shifts rightward ; 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 in blue (D1) to the new, red demand curve (D2).

What can cause demand to increase? Or, more generally, what causes demand to change? There are five factors that cause demand to change. These factors are listed below and are explained on pages 73 and 74 of the textbook. 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 what the textbook gives 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 "Helpful Hint" 3 on page 30 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 1, 2, 3, 4, 6, and 12, Multiple Choice questions 1, 2, 3, 4, 13, and 15, and Short Answer questions 2, 3, and 4. In the Economics in Action, check out questions 1 through 5 in Multiple Choice Quiz in the Review section of Chapter 4. If you have a solid mastery of the ifference between a movement along the demand curve and a shift in the demand curve, you should be able to get at least 18 of these 20 questions correct.

Would you like to study another chapter or study supply?