Introduction
In previous sessions, we discussed in detailed about the concept of demand including the Demand Function, Demand Curve and Law of Demand. We saw that the quantity demanded for a good by a consumer depends on several factors including the taste and preferences of the consumer, income of the consumer, the price of that particular good or commodity and the price of its substitutes and complements. And studied various relationship between quantity demanded for a good and all the factors like income and prices of other goods.
While discussing the demand function, we exclusively focused on the price of that good i.e., we studied mainly the relation between quantity demanded of a good by consumer with the price of that good assuming all other factors to be same or unchanged. And as we know, the graphical representation of the demand function is what we know as Demand Curve. So we studied demand curve by keeping in focus only one factor that is the price of the good. And we kept the other factors such as income of the consumer and taste & preferences same or constant.
But what happens to the demand curve when other factors which are imperial in deciding the demand for a good change. In this session we will discuss the impact on demand curve of the changes in factors other than price i.e., impact of changes in income of the consumer or taste & preferences on the demand curve.
Shifts in the Demand Curve
Before discussing in detail the impact of changes in different factors on demand curve, it is very important to have a basic idea of how a demand curve shifts. Whenever there is a change in any factor other than price, there will be a change in demand at each price points which will result in a shift in the demand curve. The shift in the demand curve is presented graphically here.
Change in Income keeping other factors unchanged
First let us discuss the impact on demand curve if the income of the consumer changes while keeping price of the substitute or complement good and taste & preferences of the consumer are given or constant. In such a scenario with given prices of other goods and taste & preferences constant, an increase in income results in change in demand at each price point changes resulting in a shift in the demand curve.
There can be two directional shift in the demand curve; rightward or leftward. The shift depends on the nature of good. As we know there are two types of goods; normal goods and inferior goods. In case of normal goods, an increase in income with other factors i.e., price of other good and preferences remaining same, there will be a rightward shift in the demand curve. In case of inferior goods, an increase in income with other factors i.e., price of other good and preferences remaining same, there will be a leftward shift in the demand curve.
Change in price of substitute or complement good keeping other factors unchanged
When prices of related goods changes while assuming the income of the consumer and taste & preferences of the consumer to be constant or same, there will be a change in demand at each price point changes resulting in a shift in the demand curve.
In case of substitute good, an increase in price of a substitute good would result in a rightward shift in the demand curve. At the same time a decrease in price of a substitute good would result in a leftward shift in the demand curve. For example, as tea and coffee are a pair of substitute goods, an increase in price of tea would result in rightward shift in demand curve of coffee. And decrease in price of tea would result in leftward shift in the demand curve of the coffee.
In case of complementary good, an increase in price of a complementary good would result in a leftward shift in the demand curve. At the same time a decrease in price of a complementary good would result in a rightward shift in the demand curve. For example, tea and sugar are consumed together thus are complementary. An increase in price of sugar would result in a leftward shift in the demand curve of tea and a decrease in price of sugar would result in a rightward shift in the demand curve of tea.
Changes in Taste and Preferences of the Consumer keeping other factors unchanged
When there is a change in taste and preferences of the consumer while assuming the income of the consumer and prices of related goods to be constant or same, there will be a change in demand at each price point changes resulting in a shift in the demand curve.
There can be two cases of changes in taste and preferences of the consumer; either they change in favour of a good or can be unfavourable for a good.
In case, where there is a change in taste and preferences of a consumer in favour of a good, there will be a rightward shift in the demand curve of that good. For example, in summer, the consumers will favour purchasing an air conditioner resulting in increased demand for the same and there will be a rightward shift in the demand curve of the air conditioner.
In case, where there is a change in taste and preferences of a consumer in a unfavourable manner, there will be a leftward shift in the demand curve of that good. For example, the demand for ice-cream decreases in winter which results in reduced demand for the same and there will be a leftward shift in the demand curve of the ice-cream.
Conclusion
First let us discuss the impact on demand curve if the income of the consumer changes while keeping price of the substitute or complement good and taste & preferences of the consumer are given or constant. In such a scenario with given prices of other goods and taste & preferences constant, an increase in income results in change in demand at each price point changes resulting in a shift in the demand curve.
There can be two directional shift in the demand curve; rightward or leftward. The shift depends on the nature of good. As we know there are two types of goods; normal goods and inferior goods. In case of normal goods, an increase in income with other factors i.e., price of other good and preferences remaining same, there will be a rightward shift in the demand curve. In case of inferior goods, an increase in income with other factors i.e., price of other good and preferences remaining same, there will be a leftward shift in the demand curve.
Change in price of substitute or complement good keeping other factors unchanged
When prices of related goods changes while assuming the income of the consumer and taste & preferences of the consumer to be constant or same, there will be a change in demand at each price point changes resulting in a shift in the demand curve.
In case of substitute good, an increase in price of a substitute good would result in a rightward shift in the demand curve. At the same time a decrease in price of a substitute good would result in a leftward shift in the demand curve. For example, as tea and coffee are a pair of substitute goods, an increase in price of tea would result in rightward shift in demand curve of coffee. And decrease in price of tea would result in leftward shift in the demand curve of the coffee.
In case of complementary good, an increase in price of a complementary good would result in a leftward shift in the demand curve. At the same time a decrease in price of a complementary good would result in a rightward shift in the demand curve. For example, tea and sugar are consumed together thus are complementary. An increase in price of sugar would result in a leftward shift in the demand curve of tea and a decrease in price of sugar would result in a rightward shift in the demand curve of tea.
Changes in Taste and Preferences of the Consumer keeping other factors unchanged
When there is a change in taste and preferences of the consumer while assuming the income of the consumer and prices of related goods to be constant or same, there will be a change in demand at each price point changes resulting in a shift in the demand curve.
There can be two cases of changes in taste and preferences of the consumer; either they change in favour of a good or can be unfavourable for a good.
In case, where there is a change in taste and preferences of a consumer in favour of a good, there will be a rightward shift in the demand curve of that good. For example, in summer, the consumers will favour purchasing an air conditioner resulting in increased demand for the same and there will be a rightward shift in the demand curve of the air conditioner.
In case, where there is a change in taste and preferences of a consumer in a unfavourable manner, there will be a leftward shift in the demand curve of that good. For example, the demand for ice-cream decreases in winter which results in reduced demand for the same and there will be a leftward shift in the demand curve of the ice-cream.
Conclusion
In this session, we discussed how factors other than price which affects the quantity demanded for a good by the consumer, when changes bring a shift in demand curve for a particular good.
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