Changes in the conditions of demand bring about shifts in the demand curve

The conditions of demand for a product are as follows:

• 1.Changing prices of a substitute good

Substitutes are goods in competitive demand and act as replacements for another product

• A rise in price of the Apple iPhone will cause a rise in demand for Samsung phones

• Higher electricity prices may encourage use alternative sources of energy

• Air travel and train services – cheaper flights between London and Glasgow might cause a fall in demand for rail services between the two cities

• 2.Changing price of a complement

Two complements are in joint demand – e.g. DVD players and DVDs, iron ore and steel.

A rise in the price of a complement to Good X should cause a fall in demand for X. An increase in the cost of flights from London Heathrow to New York would cause a decrease in the demand for hotel rooms in New York and also a fall in the demand for taxi services both in London and New York.

A fall in the price of a complement to Good Y should cause an increase in demand for Good Y. For example a reduction in the price of the new iPhone should lead to an expansion in demand for the iPhone and a complementary increase in demand for download applications.

• 3.Changes in the income of consumers

• Most of the things we buy are normal goods. When income goes up, our ability to purchase goods and services increases, and this causes an outward shift in the demand curve. But when incomes fall there will be a decrease in the demand, except for inferior goods

• Discretionary income is disposable income less essential payments like electricity & gas and mortgage repayments. An increase in interest rates often means an increase in monthly mortgage payments reducing demand. In recent years we have seen a sharp rise in the cost of utility bills with a series of hikes in the prices of gas and electricity. This has eaten into the discretionary incomes of millions of households

• 4.The effects of advertising and marketing: Heavy spending on advertising and marketing can help to bring about changes in consumer tastes and fashions. In 2009, online advertising spending overtook television expenditure for the first time.

• 5.Interest rates and demand

• Many products are bought on credit using borrowed money, thus the demand for them may be sensitive to the rate of interest charged by the lender. Therefore if the Bank of England decides to alter interest rates – the demand for many goods and services may change.

• Examples of “interest sensitive" products include household appliances such as washing machines and fridge freezers, electronic goods, new furniture and motor vehicles. The demand for housing is affected by changes in mortgage interest rates.

Key summary

Give me 5 reasons why demand may increase (i.e. the demand curve shifts to the right)

• Increasing income (for normal goods)
• Decreasing income (for inferior goods)
• Rising price of substitutes
• Falling price of complements
• Effective advertising

Give me 5 reasons why demand may decrease (i.e. the demand curve shifts to the left)

• Change in consumer tastes and preferences away from the product
• Rise in interest rates leading to a fall in demand for products bought on credit
• Expected fall in prices leading consumers to delay their purchases
• A rise in unemployment during a recession
• A rise (appreciation) in the exchange rate which makes import (substitutes) cheaper