Economics, 3rd Edition

Shifts in the Demand Curve

Any change that raises the quantity that buyers 

wish to purchase at a given price shifts the 

demand curve to the right. Any change that 

lowers the quantity that buyers wish to purchase 

at a given price shifts the demand curve to 

the left.

Sh

Sh

if

ift

i

i

h

th

D

D

FIGURE 3.3

Increase

in demand

Decrease

in demand

Price of milk

per litre (

€)

0

Quantity of milk

demanded (litres)

Demand curve, 

D

3

Demand

curve, 

D

1

Demand

curve, 

D

2

The following is a short summary of the factors affecting demand, changes in which cause a shift of 

the demand curve.

Prices of Other (Related) Goods 

Suppose that the price of milk falls. The law of demand says that you 

will buy more milk. At the same time, you will probably buy less fruit juice. Because milk and fruit juice 

are both refreshing drinks, they satisfy similar desires. When a fall in the price of one good reduces the 

demand for another good, the two goods are called 

substitutes

. Substitutes are often pairs of goods 

that are used in place of each other, such as butter and margarine, pullovers and sweatshirts, and cinema 

tickets and DVD rentals. The more closely related substitute products are, the more effect we might see 

on demand if the price of one of the substitutes changes.

substitutes

 two goods for which an increase in the price of one leads to an increase in the demand for the other

Now suppose that the price of breakfast cereals falls. According to the law of demand, more packets 

of breakfast cereals will be bought. Yet, in this case, the demand for milk will increase as well, because 

breakfast cereals and milk are used together. When a fall in the price of one good raises the demand for 

another good, the two goods are called 

complements

. Complements are often pairs of goods that are 

used together, such as petrol and cars, computers and software, bread and cheese, strawberries and 

cream, and bacon and eggs.

complements

 two goods for which an increase in the price of one leads to a decrease in the demand for the other

Income

What would happen to your demand for milk if you lost your job? Most likely, it would fall. A lower 

income means that you have less to spend in total, so you would have to spend less on some – and prob-

ably most – goods. If the demand for a good falls when income falls, the good is called a 

normal good

.

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48  PART 2  SUPPLY AND DEMAND: HOW MARKETS WORK

inferior good

 a good for which, ceteris paribus, an increase in income leads to a decrease in demand (and vice versa)

normal good

 a good for which, ceteris paribus, an increase in income leads to an increase in demand (and vice versa)

Not all goods are normal goods. If the demand for a good rises when income falls, the good is called 

an 

inferior good

. An example of an inferior good might be bus rides. As your income falls, you are less 

likely to buy a car or take a taxi and more likely to take the bus. As income falls, therefore, demand for bus 

rides tends to increase.

Tastes 

A key determinant of your demand is your tastes. If you like milk, you buy more of it. Understand-

ing the role of tastes in consumer behaviour is taking on more importance as research in the fields of 

psychology and neurology are applied to economics.

Population 

Because market demand is derived from individual demands, it follows that the more buyers 

there are the higher the demand is likely to be. The size of the population, therefore, is a determinant 

of demand. A larger population, ceteris paribus, will mean a higher demand for all goods and services. 

Changes in the way the population is structured also influences demand. Many countries have an ageing 

population and this leads to a change in demand. If there is an increasing proportion of the population aged 

65 and over, the demand for goods and services used by the elderly, such as the demand for retirement 

homes, insurance policies suitable for older people, the demand for smaller cars and for health care ser-

vices, etc. is likely to increase in demand as a result.

Advertising 

Firms advertise their products in many different ways and it is likely that if a firm embarks on 

an advertising campaign then the demand for that product will increase.