Changes in Demand by Omkar Abhyankar

 In this article we will explore how the entire demand for a good can change. First, let’s review the difference between the demand of a good and the quantity demanded of a good since the two concepts are often mixed up. The quantity demanded is the exact quantity which buyers are willing to buy at a specific price. Demand represents all quantities demanded across various prices, as represented by the demand curve. We know that the quantity demanded can increase or decrease with a change in the price. Let’s observe how the entire demand for a good can change. There are many factors which can cause the demand for a good to increase or decrease. A helpful acronym to remember all these factors is “M.E.R.I.T”. M stands for market size, E stands for expectations, R stands for related goods, I stands for income, and T stands for tastes. Let's take a closer look at each one of these factors and see how they affect the demand for a good.

M -- Market Size:

This first factor accounts for the number of consumers (buyers) in the market. If more consumers enter the competitive market, then this would signify that more people are interested in the good sold in that market. Since more people are interested in that good, the demand for that good would increase. Conversely, consumers leaving the market would signify less interest in the good and therefore a decrease in the demand for that good. Therefore, we can conclude that the market size, which is the number of consumers in the market, is proportional to the demand for a good. 

E -- Expectations:

This factor accounts for expected future price changes. If consumers expect that in the next year, the price of the good will drop significantly, then people would rather buy the good at a lower price the following year causing the current demand for the good to drop. On the other hand, if the consumers expect that the prices for a good will be higher in the future, then the demand for that good would increase since people would want to buy the good right now when it is cheap rather than in the future when it is costly.

R -- Related Goods:

This factor accounts for the possible relationships between multiple goods. Goods can have two types of relationships with each other. They can either be complementary goods, or they can be substitute goods. Two goods are complementary goods if they are used simultaneously. For example, butter and bread would be considered as complementary goods since butter and bread are often used together. If the demand for bread goes up, then the demand for butter would also increase since butter is needed alongside the bread. So generally speaking, we can see that if the demand for one of the complementary goods goes up, then the demand for the other will also increase while if the demand for one good goes down, then the demand for the other will also decrease. Substitute goods are the opposite of complementary goods. Two goods are considered substitutes when one good can replace the other. For example, Domino's Pizza and Papa John’s pizza both sell similar products and therefore can replace one another. To elaborate, if the price of Domino’s pizza is very high, then consumers can order their pizza from Papa John’s instead and ultimately substitute Domino’s pizza with Papa John’s pizza since Papa John’s pizza is cheaper. Therefore, substitute goods have an inverse relationship with one another. If two goods are substitutes of one another, and the demand for one good increases, then the demand for the other good must decrease. 

I -- Income:

This factor accounts for consumers’ income. For most goods, if consumers’ income increases, then consumers have more money to spend and therefore would buy more of a good ultimately  causing the demand for that good to increase. While if the consumers’ income decreases, then those consumers do not have too much money to spend and therefore would buy less of that good ultimately leading to a decrease in the demand for that good. Goods which have this proportional relationship between the income of consumers and the demand for a good are called “normal goods”. However, there are also goods which share an inverse relationship with the income of consumers. These goods are called “inferior goods” and typically consist of goods which are not the most luxurious. For example, suppose we are observing the market for a cheap non-luxurious car. Now if consumers’ income increases, then those consumers would most likely go buy more luxurious cars which would result in a decrease in the demand for that cheap non-luxurious car. Therefore, for inferior goods, when consumers’ income increases, the demand for that inferior good decreases since the consumer would most likely go purchase an upgrade from that inferior good.

T-- Tastes:

This factor accounts for the current consumer preferences. Suppose we are observing the market for hot chocolate. As summer approaches, people would prefer colder foods or beverages and therefore the demand for hot chocolate would decrease. If a good satisfies the consumer’s current preferences, then the demand for the good will increase. If the good does not satisfy the consumer’s current preferences, then the demand for the good will decrease.

Now that we have considered all the factors which can change the demand for a good, let’s look at how change in demand is shown graphically. First, let’s look at how an increase in demand is modeled graphically:

In this graph D0 represents the initial demand for a good while D1 represents the increased demand for the good. Whenever demand increases for a good, the demand curve will shift to the right. This is because when demand increases, consumers are essentially willing to buy more quantities of the good at each price therefore making every point on the initial demand curve shift right which ultimately causes the entire demand curve to shift to the right.

Now let’s look at how a decrease in demand is modeled graphically:

In this graph D0 represents the initial demand for a good while D1 represents the decreased demand for the good. Whenever demand decreases for a good, the demand curve will shift to the left. This is because when demand decreases, consumers are essentially willing to buy less quantities of the good at each price which makes every point on the initial demand curve shift left, ultimately shifting the entire demand curve to the left.

In the next article, we will focus on the concept of supply in a competitive market and how the supply of a good is modeled graphically.