Vertical and Horizontal Shifts in Demand Curves - Essay Example

The determinants that cause a shift in the demand curve are disposable income, substitute goods, complementary goods, tastes and preferences, advertisements, distribution of income, new goods, government, size of population, changing age structure of the population, and expectations about future relative prices. One of the determinants that causes a shift in the demand curve is income (Dominick, 2003; Ken, 2001; Sloman, 1994). The income that one refers to is the disposable income. Disposable income is income after taxation. The ability of households to buy goods and services is based on their income. This is a very important determinant. Generally, a rise in income is associated with an increase in demand for most goods (normal goods) (Sloman, 1994). Examples are cars and other durable goods. Demand for some goods is unaffected by a change in income. For example, demand for salt and furniture is satiated above a certain level of income. Demand for some goods will fall as income rises (inferior goods) (Sloman, 1994). These are often the less expensive substitutes of another better quality good. For example, consumers reduce their demand for cheap televisions with fewer gadgets and increase their demand for expensive televisions with more gadgets when income rises. The ability to afford a good, especially expensive durable goods, will depend also on the availability of credit facilities. Another determinant that causes a shift in the demand curve is substitute goods (Dominick, 2003; Sloman, 1994). These are goods that can be used to replace one another to satisfy a particular want. Consumers choose among substitutes partly on the basis of their relative prices. Examples of substitute goods are butter and margarine, tea and coffee, and apples and oranges. These goods are in competitive demand fulfilling the same kind of want. A rise in the price of Good Y will tend to increase the demand for Good X that has become relatively cheaper. The two goods are substitutes if an increase in the price of one leads to an increase in the demand for the other. For example, if the price of tea increases it is expected that the demand for coffee will increase. The quantity demanded for tea is expected to fall. The third determinant that causes a shift in the demand curve is complementary goods (Dominick, 2003; Sloman, 1994). A good is a complement to another good to the extent that it is used jointly. The goods are consumed together (in combination) to satisfy some particular want. Examples are car and petrol, toothbrush and toothpaste, mechanical pencil and lead, and camera and film. When goods are complementary, a change in the price of one good will cause a change in demand for the other. Thus the demand for goods will change with a price change in its complementary good. For example, when the price of cameras falls, the demand for films will rise. The fourth determinant that causes a shift in the demand curve is tastes and preferences (Dominick, 2003; Ken, 2001; Sloman, 1994). Demand is affected by consumer’s willingness to purchase different goods. Tastes and preferences affect this willingness. Consumer’s tastes and preferences change over time and this disturbs the conditions of demand. Examples are fashion goods, karaoke sets, and health foods. There are many factors that influence tastes such as medical research and singers. Any change in favor of a good will experience an increase in demand which will shift the demand curve to the right; while those that lose popularity will experience a fall in demand. The fifth determinant that causes a shift in the demand curve is advertisements (Nelson, 1975). Promotion campaigns are important in influencing demand. Taste and preferences can be affected by advertising. Advertisements result in the demonstration effect (keeping up with the Joneses). A successful advertising campaign obviously increases the demand for a product. Advertising may also be aimed at making the demand for a product less elastic. The sixth determinant that causes a shift in the demand curve is the distribution of income (Sloman, 1994). It is not only the level of income that influences demand but also the distribution of income. Redistribution of income usually involves taxing the rich and giving subsidies to the poor. Measures that produce a more equal distribution of income will tend to decrease the demand for expensive, luxury commodities. For example, a more even distribution of income might increase the demand for hi-fi equipment but decrease the demand for luxury yachts. The seventh determinant that causes a shift in the demand curve is new goods (Berg, 2002). Invention of new goods with the same price range as existing goods will decrease the demand for the latter. For example, the invention of the microwave oven decreases the demand for the conventional oven. The eighth determinant that causes a shift in the demand curve is government (Dorel, 2005). Government frequently influences demand through legislation. For example, legislation that stipulates car seats for children increases the demand for car seats. Laws concerning smoking in public places and cigarettes buying by teenagers affect the demand for cigarettes. The ninth determinant that causes a shift in the demand curve is the size of population (Shepherd, 1936). With per capita income given, a rise in the population will shift the market demand for many goods to the right. The tenth determinant that causes a shift in the demand curve is the changing age structure of the population (Mumy, 2006). A rising population caused by people living longer will increase the demand for medical care, walking sticks, and dental care. The last determinant that causes a shift in the demand curve is changes in expectations about future relative prices (Sloman, 1994). Changing views about future prices influence the conditions of demand because many goods are durable and storable. Expectation of future price increase increases the current demand for the good. The determinants that cause a shift in the supply curve are the prices of the factors of production, the number of firms in the industry, the state of technology, a change in the price of other goods in competitive supply, a change in the price of other goods in joint supply, government policy, weather, and the attitude of the firms. One of the determinants that causes a shift in the supply curve is the prices of the factors of production (Dominick, 2003; Ken, 2001; Sloman, 1994). A change in the price of a factor will cause changes in the relative profitability of producing goods and services and results in firms shifting from producing one good to another thus affecting market supply. For example, in countries where labor cost is high, production is capital intensive. The second determinant that causes a shift in the supply curve is the number of firms in the industry (Dominick, 2003). The more firms there are in the industry the greater the supply. Generally the “sunrise” industry will see a greater supply. The third determinant that causes a shift in the supply curve is the state of technology (Dominick, 2003; Ken, 2001). When production techniques change the conditions of supply will vary. Technical progress, introduction of new technology, better organisation and management will lower the unit costs of production and shift the supply curve to the right. The fourth determinant that causes a shift in the supply curve is a change in the price of other goods in competitive supply (Sloman, 1994). When goods are in competitive supply, more production of one means less of other will be produced as resources can be switched quite easily from one use to the other. For example, a rise in the price of beef will tend to produce a fall in the supply of milk. The fifth determinant that causes a shift in the supply curve is a change in the price of other goods in joint supply (Sloman, 1994). When goods are jointly supplied, the production of one will lead to an increase in supply of the other. For example, a rise in the price of beer will tend to increase the supply of hides. The sixth determinant that causes a shift in the supply curve is government policy (Dominick, 2003). The government is able to influence supply, increasing or decreasing supply through its policy, usually by imposing taxes or through subsidies or taxes respectively. The imposition of indirect taxes on a group of producers effectively increases their costs of production and tends to reduce the market supply. Subsidies are cash payments to producers and tend to reduce costs indirectly. This will increase the market supply. The seventh determinant that causes a shift in the supply curve is weather (Sloman, 1994). The weather has an impact on agricultural products. Too much or too little rain will affect the crops and cause the harvest to be a poor one. Poor harvest reduces supply. On the other hand, bumper harvest increases supply. This particular factor is beyond the control of man. The last determinant that causes a shift in the supply curve is the attitude of the firms (Sloman, 1994). This refers to the goals of the firm. Changes in the goals of the producers will affect the supply. In theory, the firm is assumed to be a profit-maximising firm. Firms might have other goals. If it worries about risk, it will pursue to produce other products even though they promise lower profits. REFERENCES Berg, M. (2002). From Imitation to Invention: Creating Commodities in Eighteen Century Britain. Economic History Review, 55, 1-30. Dominick, S. (2003). Principles of Economics. London: McGraw-Hill. Dorel (2005). Dorel Working Together with Ontario Government to Promote New Car Booster Seat Legislation. Retrieved July 5, 2006 from http://www.dorel.com/press/2005/DIIPR120905E.pdf Ken, F. (2001). Essential Economics. London: Palgrave. Mumy, G. (2006). Demand. Retrieved July 5, 2006 from http://www.econ.ohio-state.edu/mumy/econ200/Lectures/Wi06/web%20version/Lecture%204W-January%2018.ppt Nelson, P. (1975). The Economic Consequences of Advertising. The Journal of Business, 48, 213-241. Shepherd, G. (1936). Vertical and Horizontal Shifts in Demand Curves. Econometrica, 4, 361-367. Sloman, J. (1994). Economics. London: Prentice Hall. Read More