The Law of Demand states that the demand curve is downward sloping.
There are TWO types of change in demand;
1. Movement ALONG the demand curve
2. SHIFTS in the demand curve
A movement ALONG the demand curve
A movement along the demand curve is caused by a change in PRICE of the good or service. For instance, a fall in the price of the good results in an EXTENSION of demand (quantity demanded will increase), whilst an increase in price causes a CONTRACTION of demand (quantity demanded will decrease).
A SHIFT in the demand curve
A shift in the demand curve is caused by a change in any non-price determinant of demand. The curve can shift to the right or left.
A rightward shift represents an increase in the quantity demanded (at all prices), D1 to D2, whilst a leftward shift represents a decrease in the quantity demanded (at all prices). D1 to D3.
The movements can be caused by the following;
- change in consumer income - If consumer income increases, then consumers buy more normal/luxury items and the demand curve shifts to the right (D1 to D2).
- Change in the price of other goods - if the price of a complementary good increases then the demand for the good will fall. This will result in a leftward shift in the demand curve of any complementary good (D1 to D2). However, if the price of a substitute good increases, then the demand for the other good would increase as consumers switch their consumption patterns (D1 to D2)
- Changes in tastes and fashions - if a good becomes fashionable then the demand for the good will shift to the right (D1 to D3).