Factors that Can Shift the Demand Curve

Updated Jan 26, 2023

The demand curve tells us how much of a good or service people are willing to buy at any given price (see Law of Supply and Demand). However, we know that demand is not constant over time. As a result, the demand curve constantly shifts left or right. Depending on the direction of the shift, this equals a decrease or an increase in demand. There are five significant factors that cause a shift in the demand curve: income, trends and tastes, prices of related goods, expectations as well as the size and composition of the population. We will look at each of them in more detail below.

Income

A change in income can affect the demand curve in different ways, depending on the type of goods we are looking at; normal goods or inferior goods (see also Price Elasticity of Demand).

In the case of a normal good, demand increases as the income grows. That is an increase in income results in a rightward shift of the demand curve. The reason for this is that with a higher salary, people can afford to buy more of any given good. Since people have unlimited wants, more is generally considered better. For example, students with a low income usually don’t eat at fancy restaurants that often. However, as their income grows, they are more likely to treat themselves to a nice dinner every now and then, and the demand curve shifts to the right.

By contrast, in the case of an inferior good, demand decreases as the income grows. That means an increase in income results in a leftward shift of the demand curve. This is the case for goods that tend to be replaced as income grows. A common example of an inferior good is bus rides. If people don’t have enough money to buy a car or pay for a taxi, they have to travel by bus. However, once their income allows them to buy a car, they don’t need bus rides anymore. Therefore, the demand for bus rides decreases as income increases and vice versa.

Trends and Tastes

When a good or service comes into fashion, its demand curve shifts to the right (all other things equal). By contrast, the demand curve shifts to the left once another trend emerges, and the good or service goes out of fashion again.

To give an example, think of the clothes people used to wear back in the ’60s. They look a lot different from what most people wear today. This is because trends and tastes have changed over time. You would probably have a hard time selling clothes from the 60s today (even though some of them may already be considered fashionable again).

Prices of Related Goods

There are two types of related goods, each of which shifts the demand curve in opposite directions: substitutes and complements (see also Price Elasticity of Demand).

We speak of substitutes when a fall in the price of one good results in a decrease in the demand for another good. Thus, substitutes are goods that can be used to replace one another. The more closely related they are, the stronger the demand curve shifts in case of a price change of the related good. For example, let’s assume the price of ice cream falls. In that case, the quantity demanded of ice cream increases. At the same time, however, they will buy fewer candy bars because they can satisfy most of their need for sweets with ice cream (i.e., the demand curve for candy bars shifts to the left).

Meanwhile, we speak of complements when a fall in the price of one good results in an increase in the demand for another good. This is usually the case when the two goods are used together (i.e., when they complement each other). To give an example, think of cars and gas. When cars become cheaper, the quantity demanded of cars increases. As a consequence, the demand for petrol increases as well (i.e., the demand curve for gas shifts to the right) because the newly purchased vehicles also need gas.

Expectations

People’s expectations about the future can have a significant impact on demand. Or, more specifically, their expectations of future prices or other determinants that can change demand. If consumers expect prices to increase in the short run, current demand often increases, i.e., the demand curve shifts to the right, and vice versa.

For example, if consumers have reason to believe that the price of ice cream will fall significantly tomorrow, they will probably not buy a lot of ice cream today but wait until they can get it cheaper (i.e., leftward shift of the demand curve). Meanwhile, if they expect their income to increase next month, they will be more likely to spend a few dollars more on ice cream this month (i.e., rightward shift of the demand curve), even though their income hasn’t changed yet.

Size and Composition of the Population

As a rule of thumb, a larger population results in a higher demand for most goods. As a result, the demand curve shifts to the right. For example, as the population grows, the aggregated demand for food increases as well, simply because there are more mouths to feed.

In addition to that, the composition of the population also affects the demand curve. However, this relationship is quite complicated as there are many different determinants and factors that play a role. This makes it difficult to provide general statements about the direction and magnitude of the resulting shifts. This becomes apparent when we look at a simple example: Let’s say a country currently experiences a baby boom. As a consequence, the demand for diapers increases. Many years later, the population has grown old, and birthrates are down. Now, the demand for medical care and retirement homes is on the rise while the demand for diapers decreases.

Summary

Demand for goods and services is not constant over time. As a result, the demand curve constantly shifts left or right. Specifically, there are five major factors that can shift the demand curve: income, trends and tastes, prices of related goods, expectations, as well as the size and composition of the population.