The difference between a change in demand and a change in quantity demanded lies in the determining factor. Economists use the first term to describe the effect of a non-price factor on a change in quantity. Meanwhile, they use the second term to describe changes in the quantity of a good due to its price. What are the non-price factors? We will discuss this further below.
Dig deeper into the difference between changes in demand and changes in quantity demanded
Two main points distinguish between the terms change in demand and change in quantity demanded:
- Influencing factors
- Implications in the demand curve
Many factors influence the demand for a product. It could be due to changes in price or due to other factors.
A change in quantity demanded of a good occurs when its price changes. For example, we are analyzing the demand for tea. Its price change will cause a change in its quantity demanded. Thus, when the price rises, we say the quantity demanded will fall.
The opposite effect also applies. A fall in price causes the quantity demanded to increase.
Meanwhile, changes in other factors will cause changes in demand. For example, another factor could be consumer income or tastes and preferences. We usually refer to them as non-price factors or determinants.
Implications in the demand curve
Changes in quantity demanded occur along the demand curve. For example, the quantity changes from point A to point B in the graph above and occurs along the same curve line (DC1). Thus, the curve doesn’t move right or left.
Meanwhile, a change in demand involves a shift in the demand curve. If demand falls, the curve shifts to the left. Meanwhile, if demand increases, the curve shifts to the right.
The quantity changes from point A to point C in the graph above, shifting the curve to the right (from DC1 to DC2). The quantity changes for any given price combination.
What are the non-price determinants?
As explained above, changes in non-price factors cause changes in demand, and the demand curve shifts. Take the tea case above. A rise in demand and a shift in the curve to the right can occur because:
- Consumer incomes rise, so more dollars are used to buy.
- The substitute goods’ price, such as coffee, rises, making tea more attractive.
- Prices of complementary goods, such as sugar, fell.
- Consumers have more taste in tea than coffee.
- The price of tea is likely to rise in the future, so more consumers are buying it now.
- The number of tea enthusiasts is increasing.
As income rises, more dollars can be allocated to purchase goods. Still, the effect on demand can vary between goods. Economists divide them into two categories:
- Normal goods
- Inferior goods
The demand for normal goods has a positive correlation with income. Their demand increases when consumer income is higher. On the other hand, if income decreases, demand will also decrease. Thus, an increase in income causes their demand curve to shift to the right, and a decrease in income shifts the curve to the left.
Meanwhile, demand for inferior goods has a negative relationship with income. When incomes fall, the demand for them rises. On the other hand, if income increases, the demand for them decreases. Thus, an increase in income shifts the curve to the left because fewer consumers demand. Vice versa, when incomes fall, consumers hunt them even more, causing the curve to shift to the right.
Then, economists also divide normal goods into two types based on how responsive demand is to changes in income.
- Luxury goods are elastic in income. They have an income elasticity of more than 1. Customers are responsive to price changes. So, for example, an increase in income induces them to ask for more at a higher percentage than an increase in income. If income increases by 10%, their demand increases by more than 10%.
- Necessities have an elasticity of more than zero but less than 1. Customers are less responsive to price changes. They indeed increase spending on them when their income rises. But, it’s not as high as the percentage increase in income. For example, if their income increases by 10%, demand increases by less than 10%.
Price of substitute goods
When two goods substitute for each other, they satisfy the same need. So, if the price of one goes up, consumers switch to the other.
Take Pepsi and Coca-Cola as examples. The increase in the price of Coca-Cola prompted consumers to turn to Pepsi and shift its demand curve to the right. On the other hand, Pepsi’s price hike prompted them to switch to Coca-Cola.
How sensitive an item is to its substitutes does not only depend on the price. But, it also depends on their availability. If there are many substitutes available, consumers are more sensitive to price changes. This is because they can easily find substitutes for lower prices.
On the other hand, they are less sensitive if there are few available substitutes because they are difficult to find. Therefore, they tend to be reluctant to switch.
Price of complementary goods
In contrast to substitute goods, two goods are complementary if they have a positive correlation. I mean, if the price of an item goes up, it doesn’t just reduce its demand. However, it also reduces the demand for complementary goods. Conversely, a decrease in price leads to a higher demand for its complement. Such relationships occur because we use them together.
Take, for example, a printer with ink. First, rising printer prices drive its demand to go down. Then, it also reduces the demand for ink, causing the ink demand curve to shift to the left.
On the other hand, falling printer prices increase the demand for printers and, ultimately, the demand for ink. So that shifts the curve to the right.
Preferences and tastes
Preferences and tastes explain why we prefer an item over its alternatives. Thus, when consumers prefer a product, it will increase the demand for it.
Take organic foods, for example. Consumers love them more and more and are popular these days amid increasing awareness of their health. This causes their demand to increase. Consequently, the demand curve shifts to the right.
Future price expectations
Shopping decisions are not only influenced by current prices but also future prices. If we expect prices to increase in the future, we will shop now. Thus, we can save money before the price really goes up. As a result, demand now rises and shifts the curve to the right.
If all consumers had the same expectations as us, they would increase the demand now. So, it would significantly increase demand.
Such a situation is what underlies the economic bubble phenomenon. And, it can cause prices to soar too high, beyond the fundamentals.
When the bubble bursts, the price continues to fall. As prices fall, consumers prefer to delay purchases. They will see further price declines before deciding to buy. As a result, demand falls deeper and deeper over time.
The more consumers, the greater the demand, causing the demand curve to shift to the right. In a product life cycle, it occurs during the growth stage, where more new consumers enter the market.
Conversely, a decrease in the number of consumers reduces demand, shifting the curve to the left. It occurs during the decline stage of a product life cycle. Usually, consumers find a better substitute, so they turn to it.
Meanwhile, in aggregate numbers, we can use population to indicate potential demand in an economy. An increase in population increases the number of consumers in the market.
What to read next
- Demand Curve: Types, How to Draw It From a Demand Function
- Reasons For a Downward-Sloping Demand Curve
- What is the difference between a movement and a shift in the demand curve?
- What is the Law of Demand? How does it work?
- Three Assumptions Underlying the Law of Demand
- What Are the Five Exceptions to the Law of Demand?
- What is the difference between a change in demand and a change in quantity demanded?
- Individual Demand: Definition, Its Curve, Determinants
- Market Demand: Definition, How to Calculate, Determinants
- What are the six non-price determinants of demand? Examples.
- What Are The Types of Demand?
- Demand in Economics: Meaning and Determinants