Demand Curves

1) Distinguish between a shift of the demand curve for a product and a movement along the product's demand curve.

            Demand is the quantity of a good or service that consumer want to and are able to buy at a given time for a give price. There are many different kinds of variables that can alter the demand and price of a product. These variables can be divided into two main categories, price determinants and non-price determinants. Similarly, there are two main movements a demand curve can make: a shift to the left signifying a drop in demand at every price or a shift to the right signifying a rise in demand at every price.

            There are only a certain number of variables that can cause a move along the existing demand curve. That would be a change in the price of the product. The price of a good and it's demand are inversely proportional. The higher the price the lower the demand and the lower the price the higher the demand. This proportion only works, however, when exercising ceteris parabus as dictated by the Law of Demand. The Law explains that when prices fall demand will rise; this occurs for two reasons: the income effect and the substitution effect. The income effect occurs when the price of a product falls the "real income" of an individual increases because they can afford purchase more goods and in turn are more likely to buy. For example, the price of an ice cream drops from 10 dollars per serving to 7 dollars per serving; it's more affordable and therefore a consumer will be more likely to spend money on it. The substitution effect occurs when the price of a product falls it becomes more desirable in comparison to other analogous products. Consumers will use the new, cheaper products to replace other more expensive ones with the same uses and quality. Consider the same example: one ice cream costs 7 dollars per serving and another costs 10 dollars per serving despite the fact that it's nearly the same. The consumer will likely buy the cheaper ice cream. Any change in demand caused by a change in price will cause a move along the demand curve.

            With non-price determinants the situation is a lot more complex and there are a lot more factors that affect the demand curve. Each of these will cause the demand curve itself to shift to the left or right without the price changing.    Some microeconomic effects include changes in consumer income, the heightened demand of another product that can be used to replace the product at hand, the specific tastes and preferences of the consumers and the increase in demand for a product that requires a complementary product. Each of these will cause the demand curve itself to shift to the left or right without the price changing.  Other broader factors include the size of a population, the age structure of a population, changes in the age structure of the population, changes in income distribution, government policy changes, and seasonal changes. An example for microeconomic effects in complements: there is a reduction in the price of one product and that specific product is always consumed with another product that goes with it. The demand for the complementary product will increase without a change in price and ergo there will be a shift to the right; an increase in demand at every price. An example for other factors in seasonal changes: the summer comes to an end and fall approaches. Products popular and useful in the summer will have a decrease in demand without their prices changing, therefore a shift to the right.

            Overall, the difference between a shift of the demand curve and a movement along the curve is determined by what cause the demand to change. If a change in demand was caused by change in price, there will be a movement along the curve according to the two effects: income and substitution. Shifts in a demand curve a lot more complex and occur when the price of a product does not change but demand is increased by external factors like demographics and government policies. If the demand of a product changes without a change in price there will be a shift in the curve itself.

2) With reference to two different determinants of demand, explain why the demand curve for bicycles might increase.

            There are many different factors that cause the demand of a product to increase but there are two particular ways the demand will rise: along the demand curve as a result of falling price or a shift to the right of the demand curve caused by external factors not affecting the price. In the case of bicycles, any factor could increase the demand. I will use the income effect and substitution to explain.

            The production of bicycles relies heavily on the availability and price of aluminum alloys. At some point in time the price of aluminum alloy decreases and the production of bicycles is cheaper. Because the production of bicycles is cheaper the overall price of the final product will decrease as well. This causes an increase in the "real income" of consumers who will be more inclined to buy bicycles as they become more affordable. This drop in price has cause a rise in the demand of bicycles along the existing demand curve as illustrated below. The move from point A to B indicates decrease in price, increase in demand.

The demand for bicycles could also potentially increase because it is being substituted for something else. In cities cars and buses are usually the main mode of transport for the average citizen. At some point the price of glass windshields goes up dramatically and it becomes very expensive to produce and supply cars or buses to the public. Because the price of cars and bus fare has risen so drastically people are looking for an alternative form of transport and turn to bicycles. The price of bicycles has not gone up or down but the demand has increased because people have used it as a cheaper alternative to cars or buses. In this case the demand curve itself shifts to the right to indicate the demand has gone up at every price. This is shown in the graph below.