Shifting Of A Market Demand Curve 1
3.4. Is price the only variable influencing the demand for a good or service?
Recall that demand indicates a willingness and the financial ability to buy a good or service. Willingness and ability to buy a commodity are influenced not only by the commodity's price but also by the income earned by consumers, preferences for a good or service (taste), the number of potential buyers in a market area, and the price of substitute and complementary commodities. When the market demand schedule in Table 3-5 was derived, variables other than price were unchanged. When these other variables change, quantity demanded at each price changes since there will be an increased or decreased willingness and/or ability to buy a good or service. For example, more individuals were willing to purchase brussels sprouts in Problem 3.3 as a result of the indication by medical research that consumption of brussels sprouts prolongs life. Economists classify changes in variables other than price of the commodity as a change in demand.
3.5. (a) What causes the market demand for a commodity to increase (i.e., causes the market demand curve to shift up and to the right)?
(b) What causes market demand to decrease (i.e., causes the market demand curve to shift down and to the left)?
(c) Distinguish between an increase in the quantity demanded and an increase in demand.
(d) Distinguish between a decrease in the quantity demanded and a decrease in demand.
(a) In defining the market demand curve for a commodity, the number of consumers in the market, their tastes, their money incomes, and the prices of substitute and complementary commodities are assumed to be unchanging. Substitute commodities are those which satisfy the same basic want, such as coffee and tea. Complementary commodities are those which are used together, such as cars and gasoline. These are to be distinguished from independent or unrelated commodities such as sodas and cars, pencils and refrigerators. Market demand for a commodity increases (the market demand curve shifts up and to the right) when (1) the number of individuals buying the commodity increases (which would occur as a result of population growth), (2) consumers' preference for the commodity increases (increased concern about weight would induce more people to drink diet soda), (3) consumers' incomes rise (occurs during an economic expansion), (4) the price of a substitute commodity increases (more potatoes are demanded when the price of rice increases), or (5) the price of a complementary commodity falls (individuals purchase more fuel-efficient cars when gasoline prices rise). An increase in demand means that at each price, more units of the commodity are demanded per unit of time.
(b) Market demand decreases (the market demand curve shifts down and to the left) when (1) the number of individuals buying the commodity decreases, (2) consumers' preference for the commodity decreases, (3) consumers' incomes fall, (4) the price of a substitute commodity decreases, or (5) the price of a complementary commodity rises. A decrease in demand means that at each price, individuals demand fewer units of the commodity per unit of time.
(c) An increase in quantity demanded indicates that there is a decrease in price and therefore a movement down a given demand curve, while holding constant other variables that influence demand. An increase in demand refers to a shift to the right by the entire demand curve and indicates that at each price, individuals are willing to purchase more units of the commodity per unit of time.
(d) A decrease in quantity demanded indicates an increase in price and therefore a movement up a given demand curve, while holding constant variables other than price. A decrease in demand refers to a shift to the left by the demand curve and indicates that less of the commodity is purchased at each price per unit of time.
3.6. Explain what happens to the demand curve for air transportation between New York City and Washington, D.C., as a result of the following events:
(a) The income of households in Metropolitan New York and Washington, D.C., increases 20%;
(b) the U.S. government subsidizes Amtrak, and the cost of a train ticket between New York City and Washington, D.C., is reduced 50%;
(c) the number of businesses with offices in both New York City and Washington, D.C., doubles;
(d) the price of an airline ticket decreases 20%.
(a) Individuals will travel more since they have more disposable income. The demand for air transportation between NYC and Washington increases; the demand cuive shifts up and to the right.
(b) The cost of an alternative mode of transportation between NYC and Washington has decreased; thus, more individuals will travel by train between NYC and Washington. The demand for air transportation decreases; the demand curve shifts down and to the left.
(c) There should be increased business travel between NYC and Washington. This increased demand for air transportation shifts the demand curve up and to the right.
(d) There is no shift but there is a movement down the existing demand curve; the lower price for an airline ticket results in an increase in the number of people traveling by air between NYC and Washington.
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