The Price Mechanism - Explaining Shifts in Market Demand

What are the key factors that can cause a change in market demand for different goods and services?

This short revision video takes you through the key points to help your understanding of the price mechanism.

Market demand is the sum of the individual demand for a product from buyers in the market. Individual demand is the quantity that a consumer is willing and able to pay for a good or service at a given price in each time period.

Many exam questions ask you to analyse possible causes of shifts in demand and their impact on market prices along with revenues and profitsfor producers. Be careful to distinguish between demand for an individual firm’s products and market (industry) demand as a whole.

FACTORS CAUSING AN OUTWARD SHIFT IN MARKET DEMAND

• Rising real disposable incomes of consumers
• Growing total size of population
• Changes in the age structure of a population
• Availability of credit and the cost of credit (loan interest rates)
• Rising relative prices of substitutes
• Falling prices of complementary goods and services
• Changing consumer tastes and preferences (impacted by advertising)
• Speculative demand – such as for financial assets and commodities