Changes in Demand

A number of factors can change demand. If demand is the amount that a consumer is willing and able to purchase at each price, changes in a consumer’s desire or ability to purchase will change demand.  If you get a job that pays more, your increased income will give you the ability to buy more. With your higher pay, you might buy more clothes, go out to eat more often, or move to a more expensive home.

Let’s use look at how income can affect demand. Figure 1 shows the initial demand for automobiles as D₀. At point Q, for example, if the price is $20,000 per car, the quantity of cars demanded is 18 million. D₀ also shows how the quantity of cars demanded would change as a result of a higher or lower price. For example, if the price of a car rose to $22,000, then the quantity demanded would decrease to 17 million, at point R.

How Higher Incomes Shift Demand

The original demand curve D₀, like every demand curve, is based on the assumption that no other economically relevant factors change. Now, imagine that the economy expands in a way that raises the incomes of many people, making cars more affordable. How will this affect demand? How can we show this graphically?

Return to Figure 1. The price of cars is still $20,000, but with higher incomes, the quantity demanded has now increased to 20 million cars, shown at point S. As a result of the higher income levels, the demand curve shifts to the right to the new demand curve D₁, and this indicates an increase in demand. Table 1, below, shows clearly that this increased demand would occur at every price, not just the original one.

Table 1. Price and Demand Shifts: A Car Example

Price	Decrease to D2	Original Quantity Demanded D0	Increase to D1
$16,000	17.6 million	22.0 million	24.0 million
$18,000	16.0 million	20.0 million	22.0 million
$20,000	14.4 million	18.0 million	20.0 million
$22,000	13.6 million	17.0 million	19.0 million
$24,000	13.2 million	16.5 million	18.5 million
$26,000	12.8 million	16.0 million	18.0 million

How Lower Incomes Shift Demand

Now, imagine that the economy slows down so that many people lose their jobs or work fewer hours—reducing their incomes. In this case, the decrease in income would lead to a lower quantity of cars demanded at every given price, and the original demand curve D₀ would shift left to D₂. The shift from D₀ to D₂ represents such a decrease in demand: at any given price level, the quantity demanded is now lower. In this example, a price of $20,000 means 18 million cars sold along the original demand curve, but only 14.4 million sold after demand fell.

What a Demand Curve Shift Really Means

When a demand curve shifts, it does not mean that the quantity demanded by every individual buyer changes by the same amount. In this example, not everyone would have higher or lower income, and not everyone would buy or not buy an additional car. Instead, a shift in a demand curve captures a pattern for the market as a whole: increased demand means that at every given price, the quantity demanded is higher, so that the demand curve shifts to the right from D₀ to D₁. And, decreased demand means that at every given price, the quantity demanded is lower, so that the demand curve shifts to the left from D₀ to D₂.

Normal Goods vs. Inferior Goods

We just argued that higher income causes greater demand at every price. This is true for most goods and services. For some—luxury cars, vacations in Europe, and fine jewelry—the effect of a rise in income can be especially pronounced. A product whose demand rises when income rises, and vice versa, is called a normal good. A few exceptions to this pattern do exist, however. As incomes rise, many people will buy fewer generic-brand groceries and more name-brand groceries. They are less likely to buy used cars and more likely to buy new cars. When income increases, the demand curve for normal goods shifts to the right.

A product whose demand falls when income rises, and vice versa, is called an inferior good. In other words, when income increases, the demand curve for inferior goods shifts to the left. Some examples of inferior goods are inexpensive groceries such as store brand frozen or canned goods. As incomes rise, people will tend to buy more fresh produce or more expensive brands. Instant noodles are an inexpensive yet filling food for people on a budget. But if your food budget increased because you were fortunate enough to get a raise, it is likely that you would buy other foods rather than more instant noodles.