The Allocation of Resources - Demand

This section focuses on understanding how changes in demand affect the equilibrium price and quantity in a market. We will explore this using diagrams illustrating shifts in the demand curve.

Understanding the Demand Curve

The demand curve shows the inverse relationship between the price of a good and the quantity demanded. Generally, as the price of a good increases, the quantity demanded decreases, and vice versa. This is known as the Law of Demand.

Factors Causing Shifts in the Demand Curve

Several factors can cause the entire demand curve to shift to the left or right. These shifts indicate a change in demand at every price level.

• Consumer Income:
  • Normal Goods: An increase in income leads to an increase in demand.
  • Inferior Goods: An increase in income leads to a decrease in demand.
• Consumer Tastes and Preferences: Changes in consumer preferences (e.g., due to advertising, trends, or health concerns) can shift the demand curve.
• Prices of Related Goods:
  • Substitute Goods: An increase in the price of a substitute good leads to an increase in demand for the original good.
  • Complementary Goods: An increase in the price of a complementary good leads to a decrease in demand for the original good.
• Consumer Expectations: Expectations about future price changes or income levels can influence current demand.
• Population: An increase in the population generally leads to an increase in demand for most goods.

Diagrams Illustrating Shifts in the Demand Curve

The following diagrams show how shifts in the demand curve affect the equilibrium price and quantity.

1. Increase in Demand

An increase in demand shifts the demand curve to the right.

	Price (P)	Quantity (Q)
Initial Demand	$P_1$	$Q_1$
New Demand	$P_2$	$Q_2$

Figure Caption: Suggested diagram: A rightward shift of the demand curve, showing an increase in both equilibrium price and quantity.

Explanation: The rightward shift in the demand curve leads to a new equilibrium point where the price is higher ($P_2$) and the quantity is greater ($Q_2$).

2. Decrease in Demand

A decrease in demand shifts the demand curve to the left.

	Price (P)	Quantity (Q)
Initial Demand	$P_1$	$Q_1$
New Demand	$P_2$	$Q_2$

Figure Caption: Suggested diagram: A leftward shift of the demand curve, showing a decrease in both equilibrium price and quantity.

Explanation: The leftward shift in the demand curve leads to a new equilibrium point where the price is lower ($P_2$) and the quantity is less ($Q_2$).

Impact on Equilibrium

Changes in demand have a direct impact on the market equilibrium. An increase in demand leads to a higher equilibrium price and a higher equilibrium quantity. Conversely, a decrease in demand leads to a lower equilibrium price and a lower equilibrium quantity.

Important Considerations

It's crucial to remember that shifts in the supply curve and demand curve can occur simultaneously. The combined effect of these shifts determines the new equilibrium price and quantity.