Chapter 6, Problem 1TY

To determine

Factors affecting quantity demanded of a product.

Explanation of Solution

A demand curve is a graphical representation of a demand schedule. The change in quantity demanded of a product in a demand curve is depicted in two ways as follows:

• Movement along the demand curve: This happens when the price of a good changes.A rise in price leads to an upward movement along the demand curve, whereas, a fall in price leads to a downward movement along the demand curve.

This is because, as per law of demand, when the price of a good rises/falls its quantity demanded decreases/increases.

• Shift in the demand curve: When factors other than the prices change, demand curve shifts either left or right.

Following factors lead to shift in the demand curve:

1. Income of the consumer- A consumer feels richer when his/her income rises. Thus, any rational consumer would like to consume more goods of better, high quality standards when his/ her income rises.

In this case demand curve will shift rightwards. Fall in income will shift the curve leftwards.

Goods (e.g. smart phones, trips to amusement parks, clothing) whose quantity demanded increases when the income rises keeping the price constant are called "Normal Goods".

2. However, sometimes this may not be the case. Quantity demanded may not rise with the rise in income.

For example, a consumer using a secondhand car would like to switch to a new car on rise in income. Such goods whose quantity demanded falls on rise in income are called "Inferior Goods".

3. Prices and availability of related goods- The related goods can be further divided into two categories:
a. Substitute Goods- These are the goods that can be used in place of each other without affecting the utility derived. For example, tea and coffee.

When price of a good (say, coffee) rises, then the quantity demanded of good in question (say, tea) rises, vice versa.

Increase in demand will shift the demand curve rightwards whereas decrease in demand will shift it leftwards.

b. Complementary Goods- These are the goods that are used together. For example, car and petrol. When price of a good (say, petrol) rises, then the quantity demanded of good in question (say, car) falls, vice versa.

Increase in demand will shift the demand curve rightwards whereas decrease in demand will shift it leftwards.

4. Population- More people imply more wants and hence increase in demand. Thus, increase in population shifts the demand curve rightwards due to rise in demand. Whereas decline in population will shift the curve leftwards due to fall in demand.
5. Changes in expectations about the future- Any prediction of change in income of a consumer or price of good in future impacts the change in quantity demanded of the good in question today. For example:
   a. Suppose, consumer is expecting his promotion in coming future. Thus, due to rise in income in future, he will increase the demand of some goods (say, luxury items) today.

   This will shift the demand curve rightwards. The curve will shift leftwards when the consumer expects fall in income in future.

   b. Suppose, as per market trends price of gold is expected to fall in future. Then the consumer will wait today and will buy gold in future at a lower price.

   This will lead to fall in quantity demanded of gold today, leading to leftward shift in the demand curve.