Changes In Demand

Let us see how a change in quantity demanded differs from a change in demand.

When we dealt with the impact on non-price factors on demand, for example, income and tastes and preferences, we argued that a change in these non-price factors causes a change in the quantity demanded at each price . This is the important point: At each price, the quantity demanded is different from before and we have a new demand curve. The position of the demand curve has changed – it has shifted.

When comparing the impact of a change in the price of good or service with a change in a non-price factor of demand, it should be clear that a change in price does not change the quantity demanded at each price. It simply indicates how much is demanded at the new price and a movement along the demand curve occurs, while a change in a non-price factor of demand changes the quantity demanded at each price and a shift of the demand curve occurs.

It is because of this difference between the change in quantity demanded and a change in demand that the statement – a decrease in the price of a good or service increases the demand for it – is incorrect. The reasoning behind this is as follows:

A decrease in the price does not change the relationship between the different prices and quantities demanded. At each price, the same quantities as before are demanded. It simply indicates the quantity that will be demanded at the lower price. Hence there is an increase in the quantity demanded.

A change in any of the non-price factors, however, changes the relationship between the price and quantity demanded. An increase in demand indicates that at each price, a higher quantity than before is demanded – hence we have a new demand curve to the right of the initial demand curve. There is thus an increase in demand.