4.1.3.1 Determinants of Demand for Goods and Services

A demand curve is a graphical representation of the relationship between the price of a good or service and the quantity demanded by consumers.

It is a fundamental tool in economics to understand how changes in price impact the quantity of a good or service that consumers are willing to purchase.

Components of a Demand Curve:

1. Price and Quantity Axes:
   • The vertical axis represents the price of the good or service.
   • The horizontal axis represents the quantity demanded by consumers.
2. Negative Slope:
   • A typical demand curve slopes downward from left to right, indicating an inverse relationship between price and quantity demanded.
3. Law of Demand:
   • The law of demand states that, all else being equal, as the price of a good or service decreases, the quantity demanded increases, and vice versa.

Understanding Movements Along the Demand Curve:

1. Expansion and Contraction:
   • Movement along the demand curve is caused by a change in the price of the good or service.
   • An increase in price leads to a contraction along the demand curve, reducing the quantity demanded.
   • A decrease in price leads to an expansion along the demand curve, increasing the quantity demanded.
2. Price Elasticity:
   • The degree to which quantity demanded responds to a change in price is measured by price elasticity. If the quantity demanded is highly responsive to price changes, it is considered elastic.

Causes of Shifts in the Demand Curve

Introduction:

• While movements along the demand curve are caused by changes in price, shifts in the demand curve are caused by factors other than price affecting overall demand.

Factors Influencing Shifts in the Demand Curve:

1. Changes in Consumer Income:
   • An increase in consumer income often leads to an outward shift of the demand curve, indicating a rise in the quantity demanded for most goods.
2. Price of Related Goods:
   • Substitutes: An increase in the price of a substitute good can lead to an increase in demand for the original good, shifting its demand curve outward.
   • Complements: An increase in the price of a complement can lead to a decrease in demand for the original good, shifting its demand curve inward.
3. Consumer Preferences:
   • Changes in consumer preferences and tastes can lead to shifts in the demand curve. For example, if a new health trend reduces the demand for sugary drinks, the demand curve for such drinks may shift inward.
4. Expectations:
   • If consumers expect future changes in prices or income, it can influence their current demand. For instance, anticipating a future increase in the price of a good may lead to an increase in current demand.
5. Population Changes:
   • An increase in population generally leads to an outward shift in the demand curve for many goods and services, as there are more potential consumers.

Understanding Shifts vs. Movements:

• Movements along the demand curve are caused by changes in price, while shifts are caused by non-price factors affecting overall demand.
• A shift to the right indicates an increase in demand, while a shift to the left indicates a decrease.

Glossary:

1. Demand Curve:
   • A graphical representation of the relationship between the price of a good or service and the quantity demanded by consumers.
2. Law of Demand:
   • The economic principle stating that, all else being equal, as the price of a good or service decreases, the quantity demanded increases, and vice versa.
3. Price Elasticity:
   • A measure of how much the quantity demanded of a good or service responds to a change in price.
4. Substitutes:
   • Goods or services that can be used in place of each other.
5. Complements:
   • Goods or services that are used together, so the increase in the price of one leads to a decrease in the demand for the other.