Demand Determinants

• Buyers' Income: A decrease in buyers' income for a normal good or an increase in buyers' income for an inferior good.
• Buyers' Preferences: A decrease in buyers' preferences for the good.
• Other Prices: A decrease in the price of a substitute-in-consumption or an increase in the price of a complement-in-consumption.
• Buyers' Expectations: Expectations by buyers of a decrease in the price in the future.
• Number of Buyers: A decrease in the number of buyers in the market.

Old to New

Comparative Statics

Suppose, for example, that the price of Double-Dot Carmel Fudge Pecan Pie declines. Double-Dot Carmel Fudge Pecan Pie is a prime, number one substitute for Hot Momma Fudge Bananarama Ice Cream Sundaes. To top off a tasty meal, buyers can buy a freshly prepared Hot Momma Fudge Bananarama Ice Cream Sundae or they can go for a piping hot Double-Dot Carmel Fudge Pecan Pie. They buy one or they buy the other. This is how substitutes-in-consumption work.

If the price of one substitute-in-consumption (Double-Dot Carmel Fudge Pecan Pie) declines, the quantity demanded (of Double-Dot Carmel Fudge Pecan) increases. But with more Double-Dot Carmel Fudge Pecan satisfying after dinner dessert cravings, there is less demand for Hot Momma Fudge Bananarama Ice Cream Sundaes. As such, the demand for Hot Momma Fudge Bananarama Ice Cream Sundaes decreases. And when demand decreases, the original market equilibrium is disrupted.

How is the Hot Momma Fudge Bananarama Ice Cream Sundae market affected? A decrease in the price of a substitute-in-consumption works through the other prices demand determinant to shift the demand curve leftward. Click the [Demand Decrease] button to illustrate the leftward shift of the demand curve. The OLD market equilibrium is no longer equilibrium. A NEW market equilibrium is found at the intersection of the original supply curve and the new demand curve. Click the [New Equilibrium] button to highlight this result. The new equilibrium price is Pe and the new equilibrium quantity is Qe. Note that the price is lower and the quantity exchanged is less.

Step by Step

Six Steps

• First, a determinant changes. In this case, a decrease in the price of Double-Dot Carmel Fudge Pecan activates a change in the other prices demand determinant. A determinant change ALWAYS starts the market adjustment process.


• Second, the determinant change causes a curve to shift. The decrease in the price of Double-Dot Carmel Fudge Pecan decreases the demand for Hot Momma Fudge Bananarama Ice Cream Sundae and causes a leftward shift of the Hot Momma Fudge Bananarama Ice Cream Sundae demand curve. Click the [Demand Decrease] button to illustrate this shift.


• Third, the shifted curve disrupts the market equilibrium, causing either a shortage or a surplus. In this example, the decrease in demand creates a surplus. While buyers are now willing and able to buy fewer Hot Momma Fudge Bananarama Ice Cream Sundaes, sellers continue supplying the original quantity at the original price. Up to this point, they have no reason to change. Click the [Surplus] button to highlight this imbalance.


• Fourth, the market imbalance causes the price to change. In this case, the sellers are not able to sell all of the Hot Momma Fudge Bananarama Ice Cream Sundaes that they would like. As such, they are willing and able to sell Hot Momma Fudge Bananarama Ice Cream Sundaes at a lower price. Click the [Price Decrease] button to illustrate this result.


• Fifth, the change in price causes changes in both quantities demanded and supplied. In this Hot Momma Fudge Bananarama Ice Cream Sundae market, the lower price has the intended effect of increasing the quantity demanded--which is the law of demand. It also has the unintended effect of decreasing the quantity supplied--which is the law of supply. Note that while the other prices determinant induces buyers to demand less at all prices, including the original equilibrium price, the price decrease causes the quantity demanded to subsequently rise.


• Sixth, changes in the quantities demanded and supplied both act to eliminate the market disequilibrium. In this example, the increase in the quantity demanded and the decrease in the quantity supplied eliminate the surplus. The price will continue to change as long as the market is out of balance with a surplus. The new equilibrium price at Pe is lower and the new equilibrium quantity at Qe is smaller. Click the [New Equilibrium] button to highlight this result.

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