Example - shifts and movements along a demand curve
You must be absolutely certain about what causes shifts and movements along a demand curve. Work carefully through the following example.
Example 1 - Movements along and shifts of demand curve
The diagram below, Figure 1, represents the demand for a product at a point in time. The price then was P*.
Copy this onto another piece of paper, then sketch on this new diagram the effect of the following changes. Treat each change as a separate change - in other words start each time from Figure 1. Once you have had a go at each one then follow the link below to check you got the change right.
(a) The firm launches a new, effective advertising campaign.
(b) The market price of the product rises to P2.
(c) The price of a substitute good is reduced.
(d) The price of a good falls from P1 to P2.
(e) The real incomes of the buyers of this desirable product increase significantly.
(f) There is an increase in the population size and the size of the potential market.
These should not be difficult if you keep calm. Ask yourself three questions:
- Has a 'ceteris paribus' factor (or another determinant of demand other than the price of the good itself) changed? If the answer is yes, then there is a shift.
- Will demand increase or decrease? This will determine if the shift is to the right or left?
- If the price has changed, will there be an extension or contraction of demand?