Section 2 Shifts of the Demand Curve

Preview

Objectives

After studying this section you will be able to:

1. Understand the difference between a change in quantity demanded and a shift in the demand curve.
2. Identify the determinants that create changes in demand and that can cause a shift in the demand curve.
3. Explain how the change in the price of one good can affect demand for a related good.

Section Focus

Several factors can change the demand for a good at any price. A change in demand causes the entire demand curve to shift to the left or right.

Key Terms

• ceteris paribus
• normal good
• inferior good
• complements
• substitutes

The market demand schedule for pizza in Figure 4.3 would appear to give the pizzeria owner all the information she needs to set the prices for her menu. All she has to do is look at the list, pick the price and quantity combination that will earn her the highest profit, and start baking.

Other factors, however, might have an effect. What would happen if the day after she printed a menu, the government announced that tomato sauce had a natural chemical that strengthened the immune system? Demand for pizza at all prices would climb.

When we counted the number of pizza slices that would sell as the price went up or down, we assumed that nothing besides the price of pizza would change. Economists refer to this assumption as ceteris paribus , the Latin phrase for “all other things held constant.” The demand schedule took only changes in price into account. It did not take the news reports into account, or any one of thousands of other factors that change from day to day. In this section, you will learn how economists consider the impact of these other changes on the demand for goods like pizza.

Changes in Demand

A demand curve is accurate only as long as there are no changes other than price that could affect the consumer's decision. In other words, a demand curve is accurate only as long as the ceteris paribus assumption is true. When the price changes, we move along the curve to a different quantity demanded. For example, in the graph of Ashley's demand for slices of pizza, an increase in the price from $1.00 per slice to $1.50 will make Ashley's quantity demanded fall from four slices to three slices per day. This movement along the demand curve is referred to as a decrease in the quantity demanded. By the same reasoning, a decrease in the price of pizza would lead to an increase in the quantity demanded.

A sudden winter storm can increase the demand for snow shovels.

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