A) The distinction between movements along a demand curve and shifts of a demand curve


Demand refers to the amount of consumers that are willing and able to buy a certain good at a given price in a given period of time. On ad demand curve movements are caused by changes in price. As the price decreases (p1 to p2), the quantity demanded increases (Q1 to Q2). This is due to the fact that as price decreases consumers are able to increase their consumption. If price is equal to marginal cost and consumers consume up to the point where price equals marginal utility then a decrease in price will increase the amount that can be consumed before maximum utility. In contrast to this, an increase in price will decrease the quantity demanded for that good. The downwards sloping of the curve can be explained by this inverse relationship between price and quantity. On the other hand, shifts in the demand curve are caused by non-price factors that may affect demand. An example of this would be an increase in real incomes. This would mean that consumers would be able to demand more despite no change in price.


B) The factors that may cause a shift in the demand curve (the conditions of demand)

Demand shifts

  • Changes in real incomes – As incomes increase there is likely to be an increase in consumption. This is due to the fact that consumers can now afford to buy more goods/services than they used to. Therefore demand for goods/services will increase.
  • Changes in tastes and fashions – As a good becomes fashionable it will be more desirable. This will cause more consumers to demand the good.
  • Advertising and branding – Increased spending on advertising will increase the likelihood of more people finding out about the good/service. This will also help to create a stronger brand. Overall, this will increase the demand for the good/service.
  • Changes in the price of substitutes and complementary goods – An increase in the price of substitute goods will cause the demand for them to decrease. This will increase the demand for the business’s goods. For example, if Coca Cola increased in price it means that more people are likely to buy Pepsi instead. This is because Pepsi now becomes the cheaper alternative. In contrast to this, an increase in the price of complementary goods will decrease the demand for the business’s good. For example, an increase in the price of cars is likely to decrease the demand for cars. As a result of this, the demand for petrol will also decrease as both goods are complementary.
  • Changes in size and age distribution of the population – An increase in the size of population will result in an increase in demand for goods/services within the economy. This is due to the fact that there will be more people that are buying goods/services.
  • Weather –The demand for some goods/services can be derived from the weather. For example, on a sunny day there is likely to be a much greater demand for ice cream than on a cooler day as people often have it to cool down.


C) The concept of diminishing marginal utility and how this influences the shape of the demand curve

Marginal utility is the additional utility/benefit gained from the consumption of each additional unit. Total utility will rise as additional units of a product are consumed. However, marginal utility will usually decrease with each additional increase in the consumption of a good. For example, if someone is thirsty the first glass of water that they drink is likely to give them the most utility as it quenches their thirst. 

Read more…