A demand curve is a graphical representation of the inverse relationship between the demand for a particular product and the movement or change in its price. The law of demand states that a price increase results in a decrease in demand assuming that all else is equal. A decrease in price, on the other hand, results in an increase in demand. However, aside from price, there are other factors influencing demand. These are called demand shifters.
These demand shifters are factors or variables that cause either leftward or rightward shifts in the demand curve. However, because they influence demand irrespective of price, demand shifters are specifically considered non-price determinants of demand. They cause the demand to change even if prices remain the same. These shifters are also regarded as factors that influence the quantity demanded for a particular product.
Understanding Shifters of Demand and their Effects
Examples of Demand Shifters
There are several factors or non-price determinants that can affect demand and cause the demand curve to shift in a certain direction. The most common examples of these demand shifters are the tastes or preferences of the market, the number of consumers, the prices of related of alternative and substitute products, income level, and market or public expectations. The following are the specific details of the common examples of demand shifters:
1. Tastes or Preferences
Markets are shaped in part by the individual and collective tastes and preferences of the public or consumers. There are specific factors that influence these tastes and preferences. These include cultural norms or prevailing values and beliefs, changes in consumption patterns and market trends, and the availability of information about a product as influenced by marketing strategies. Tastes and preferences affect the desirability of a product.
2. Number of Consumers
The number of consumers or the size of the market has a direct effect on demand. The arrival of new consumers in an established market results in an increase in demand for a particular product. However, due to factors such as migration, socioeconomic composition, product substitution, other causes of market disruption, or product obsolescence, among others, a particular market can shrink and result in a decrease in demand.
3. Consumer Income
Another example of a demand shifter is the income level within a particular geographic market. There is a direct relationship between income and demand because the former influences the quantity and quality of products consumers can buy. An increase in income generally results in an increase in the demand for most products. However, in certain cases, a further increase in income also results in a decrease in demand for inferior products.
4. Price of Complements
There are two types of related products. These are complements and substitutes. Complements are products bought and consumed together. Examples include milk and cereals or smartphones and mobile accessories. An increase in the price of milk can result in a decrease in the demand for cereals. Hence, when two products complement each other, there is an inverse relationship between the price of one product and the demand for the other.
5. Alternatives and Substitutes
An alternative product is a direct competitor to another product. A Samsung Galaxy smartphone is a substitute for an iPhone from Apple. A product substitute is a different product under a different product category that can fulfill the same purpose as another product. The substitute for the iPhone is a tablet computer. An increase in the price of an iPhone can result in either an increase in the demand for a Samsung Galaxy device or a tablet computer.
6. Future Expectations
Another one of the notable examples of a demand shifter is the expectations involving future market trends as influenced by available market information. These can affect the demand for a particular product. An announced release date of a newer iPhone would decrease the demand for the current generation of the same brand. An upcoming oil price hike would prompt consumers to flock to gas stations and increase the demand for current supplies.
Effects of Demand Shifters
The aforementioned examples of demand shifters explain the tendency of the demand curve to shift toward the left or the right. In a nutshell, a leftward or rightward shift in the demand curve takes place when there is a change in any non-price determinant of demand, thus resulting in a new demand curve. These shifters demonstrate that price is not the sole determinant for the level of demand for a particular product in a specific market. Note that similar to demand shifters, supply shifters are also non-price determinants affecting the quantity of supply. These non-price determinants cause a change in the quantity supplied even if the price remains the same.