Demand: movements and shifts

The demand curve, extensions and contractions along it, and the conditions of demand that shift it: income, substitutes, complements, tastes, population and more.

In spring 2020, flour disappeared.

When the first lockdown began in March 2020, flour vanished from UK supermarket shelves. Its price had not changed. People were stuck at home with time to bake, and many were worried about shortages, so they wanted far more flour at every price. Millers ran round the clock, but the small bags sold in supermarkets were a tiny part of what they normally made.

Nothing happened to the price of flour, yet demand rose. How do we show that on a diagram?

Source: National Association of British and Irish Millers (nabim), statements on retail flour supply, April 2020.

Demand and the demand curve.

Demand is the quantity of a good consumers are willing and able to buy at each price, over a period of time.

The demand curve slopes down: as the price falls, the quantity demanded rises. Two reasons: the good becomes cheaper compared with substitutes (the substitution effect), and buyers’ incomes stretch further (the income effect).

The curve is drawn holding everything except the good’s own price constant: ceteris paribus. Change the price and you move along the curve. Change anything else and the whole curve shifts.

What shifts the demand curve?

• Income: for a normal good, a rise in income increases demand. For an inferior good, such as value-range food or bus travel for some people, a rise in income decreases demand.
• Price of a substitute: a rise in the price of a substitute increases demand (tea and coffee).
• Price of a complement: a rise in the price of a complement decreases demand (printers and ink).
• Tastes, fashion and advertising: a successful advert or a new trend increases demand.
• Population and its age structure: more people, or more of the right age, increases demand. An ageing population raises demand for care homes.
• Seasons: demand for ice cream rises in summer.
• Expectations: if buyers expect prices to rise or shortages, demand increases now, as with flour in 2020.

Think first

The price of cinema tickets falls.

More people go to the cinema.

On a diagram of the market for cinema tickets, what has happened?

A change in the good’s own price moves you along its demand curve: here, an extension of demand. The curve itself only shifts when something other than its own price changes, such as incomes or the price of popcorn.

Step by step

1. At £10, buyers want 8 thousand a week.

2. The price falls to £8 and quantity demanded rises to 12 thousand. We have moved along the same curve: an extension of demand. A price rise would be a contraction. Words matter: "quantity demanded" changes, "demand" does not.

   Check: The price falls to £8 and quantity demanded rises to 12 thousand. What is this called?

   A change in the good’s own price causes a movement along the curve. A rise in quantity demanded from a lower price is an extension.

3. Now something else changes: incomes rise. At every price, buyers want more. At £8 they now want 18 thousand, not 12. The whole curve shifts right, to D2: an increase in demand.

4. A shift left, to D3, is a decrease in demand: less wanted at every price. The conditions of demand that shift the curve are on the next screen. Learn them in pairs: what shifts it right, what shifts it left.

   Check: Which would shift the demand for butter to the left?

   Margarine is a substitute. When it gets cheaper, buyers switch to it, so demand for butter falls at every price.

5. Now apply this to flour in 2020.

   Check: In 2020 people took up baking and feared shortages, but the price of flour did not change. How do we show this?

   Tastes and expectations are conditions of demand. More flour was wanted at the same price, so the whole curve shifted right.

6. Back to flour in 2020. Tastes changed, as people took up baking, and expectations changed, as they feared shortages. Both shifted demand right, from D1 to D2, at the same price. Shelves emptied because supply could not keep up at that price.

What your diagram must show

• A downward-sloping demand curve labelled D1
• A new demand curve, D2, to the right of D1
• An arrow showing the shift to the right
• At the same price, a higher quantity on D2
• Axes labelled price and quantity demanded

A common mistake

A fall in the good’s own price causes an extension along D1, not a shift. The curve only shifts when a condition of demand changes, such as income or the price of a substitute.

Exam question

Explain the difference between a movement along a demand curve and a shift in the demand curve.

Model answer

A movement along a demand curve is caused only by a change in the good’s own price, with all other factors held constant. A fall in price causes an extension of demand, a rise in the quantity demanded, and a rise in price causes a contraction.

A shift of the demand curve is caused by a change in one of the conditions of demand, such as income, the price of a substitute or complement, tastes, advertising or population. A shift to the right is an increase in demand: more is demanded at every price. A shift to the left is a decrease in demand.

For example, a fall in the price of cinema tickets causes an extension along the demand curve for tickets. A rise in the price of streaming subscriptions, a substitute for the cinema, shifts the demand curve for cinema tickets to the right.

How far the demand curve for cinema tickets shifts depends on how close a substitute streaming is: for people who would rarely go to the cinema anyway, a dearer subscription makes little difference.