Demand - Movements and Determinants

             Shift of the Demand Curve and Movement Along the Demand Curve

  Demand is the quantity of a good or service that consumers will and are capable to buy at a certain price and certain time period. The law of demand states ‘as the price of a product falls, the quantity demanded of the product will usually increase’ if all other things remain equal and constant. In all actuality, demand curves are exactly what they are called: curves. However, to simplify analysis, economists draw them as straight lines on a graph with price on the vertical axis and quantity demanded on the horizontal axis.

                A demand curve can be affected in many ways. The demand curve can shift when the worth of a product is under question by the consumer. When more of a product is demanded at every price the curve shifts to the right. This product is thought to be worth more. That means when less of a product is demanded at every price the curve shift to the left. This product is thought to be worth less. The demand curve can also shift because of other factors such as income, the size of a population, changes in the age structure of the population, changes in income distribution, government policy changes, and seasonal changes.

                Imagine this graph represents the popular UGG boot. This type of boot is so widely desired that consumers are willing to pay higher prices. Therefore, the demand curve shifts to the right because more of the product is demanded at every price.

                A movement along the product’s demand curve can occur as well. Movements are undergone because of a change in price of a product whereas shifts are related to any other determinants of demand. When the price of a product falls there may be a greater quantity of it demanded. This means if the price of a product rises, the opposite will happen: there will be a lesser quantity of it demanded.

                                          

            On this graph, imagine the Snuggie product is represented. As the price for a Snuggie drops, the consumer is willing to buy a greater demand of it. The consumer will purchase more Snuggies if the price is low. This goes for most products for sale as well.

Determinants of Demand

 The determinants of demand are used to explain the movements of a demand curve of any product. One determinant is income. However, to understand the way income may impact a product’s demand curve, we must know that there are two types of goods: normal and inferior goods. When a person’s income increases, the demand for normal goods will also increase causing a shift to the right of the good’s demand curve. The size of the shift, though, will vary depending on the good. General commodities (bread, etc.) will have curves that only shift a little bit while luxury goods (designer clothes, etc.) will have a more significant shift. When a person’s income increases, the demand for inferior goods will decrease causing a shift to the left of the demand curve. This is because inferior goods are of lower quality and non-brand name. As a person’s income goes up, they will start buying products that are of better quality.

                The price of related goods is another determinant. There are three types of relationships between products; they may be substitutes for each other, complements to each other, or simply unrelated. Substitute goods can replace each other, and so a price decrease in one product will most likely lead to a decrease in demand for the other causing a shift to the left of its demand curve. For example, if Pizza Hut lowers their prices, many people will not want Domino’s pizza any more. Complement goods can be used together, so if the price of one good increases, the demand for the other will decrease causing a shift to the right. For example, if ice cream becomes more expensive, the demand for ice cream toppings will go down. Unrelated goods have no effect upon the demand of the other. If the price of light bulbs goes up, the demand for paper clips will not change.

                Tastes and preferences of consumers is another determinant of demand that is very difficult to model. Still, it is known that an increase in preference for one product will lead to its demand curve to shift to the right and vice versa. Another determinant is the size of the population. As the size of the population grows, the demand for most products will also grow, hence a shift to the right of the demand curves. This relationship is similar for changes in age structure of the population. If there is an increase in percentage of babies, the demand for carriages would increase (a shift to the right of its demand curve) while the demand for wheelchairs for the elderly may decrease (a shift to the left). When there are changes in the income distribution where the poor become better off and the rich a bit worse off, there may be an increase in demand for basic goods causing a shift to the right of their demand curves. Government policy changes also have an effect on some products’ demand curves. For example, if taxes go up people will not have as much money to spend. The last determinant is seasonal changes. If summers become longer and winters shorter, there will be a fall in demand of coats and jackets and an increase in demand for shorts and t-shirts.

                If the demand for bicycles increases, it is possible there could have been a drop in prices or an increase in popularity of bikes. Let’s say there is a choice between roller blades and bikes, and the price of roller blades sky rockets. That would mean the demand for bicycles, the substitute good, would increase because roller-blades are too expensive. The graph below shows the demand curve of bicycles in this situation. The curve shifts to the right while there would be just a movement along the demand curve for roller blades.

                If bicycles become more popular due to the consumers’ tastes and preferences, the demand curve will also shift to the right. This is because people now prefer bikes and they are demanding more at every price. The graph below shows how the demand curve would shift whether the people are in favor or not in favor of the good, but in this case the people are in favor of bicycles so the demand curve would shift to the right.

Planned vs Free Market Economy

                The economic problem we face is because humans have a limitless number of wants but there are a limited number of resources, what should be produced, how should it be produced, and for whom should it be produced? The economies created are set up to address this issue with two main solutions: the free market economy and the planned economy. The name free market economy essentially explains itself; businesses are privately owned without intervention from the government. The economic problem is addressed by the forces of supply and demand. This means that, based on the consumer’s choices, producers will choose how much to supply. In a planned economy, the government says what to produce, how much, and for whom in order to please the masses. Everything in this type of economy is owned by the state. Although some countries may lean more towards one type than the other, most of the economies in the world are mixed.

                Neither a planned economy nor that of free market is perfect. A free market economy is more successful at motivating competition to occur. Since it is basically every man for himself, every man does in fact work to create a good quality of life. One big advantage is that resources are distributed in a better way using prices, allowing the economy to work more efficiently. However, surpluses and shortages can occur when the demand of one product changes to another. This means that the price of the product in surplus must go down so it is more widely available. Thus, the price of the product in shortage will go up until the other product is bought. Then the production can be switched to that of the product higher in demand. Because this economy is driven by the profit motive, a purely free market economy can be a terrible thing. The big companies will become corrupt and prey on other industries leading to an extreme amount of pollution, high prices, and excessive control. To fix this, like in the United States, government involvement has been integrated into the economy. Those who are negatively affected by the unfair system of profits and losses are supported with taxes while the wealthy are the ones being taxed.

                Whereas competition is at the heart of a free market economy, there is no real motivation for those in a planned economy. The government simply decides what will be produced leading choice for consumers to be very limited. For this type of economy to be one hundred percent successful, an enormous amount of information has to be collected in order to predict what consumers may want and how much businesses are able to produce. This information is very difficult to obtain and so the economy does not always operate smoothly. The government is also very prone to becoming corrupt because they have so much control. However, some of the control they do have can work as an advantage. Although it does not leave much choice for the consumers, the government can stop the production of undesirable goods. They can also change the distribution of income so as to make it more equal.

                Nearly all countries have a combination of both a free market and a planned economy; free markets are used to promote efficiency in resource distribution and when the markets fail, government planning is used to help redistribute the income. The fact that many countries that once had planned economies have changed to a free market shows that the latter has a more positive effect. Yes, Russia and China have showed that a planned economy can work when a country is developing economically, but they have failed to stay stable. Of course a purely free market economy can be dangerous as well, but it has been more prosperous over time.