- The law of demand and the demand curve
- What shifts demand? (introduction) · coming soon
A list is not enough
In the last lecture, you met the most important distinction in this topic. A change in a good's own price moves buyers along its demand curve. A change in anything else that affects buyers shifts the whole curve.
"Anything else" is a big phrase. This lecture fills it in. Economists group the things that shift demand into a short list, called the determinants of demand.
But here is a warning before we start. Many students learn this list as a set of rules: "income up, shift right; substitute price up, shift right". Then an exam question arrives with a good that does not fit the rule, and the rules fail. Some goods are bought less when people get richer. A government policy may look like a demand change but is not one. Two changes may happen at once and pull in opposite directions.
So for every determinant, we will learn the mechanism: the reason buyers change their plans. If you understand why, you never need to memorise which way. The direction follows from the reason.
The test for every determinant
Every determinant must pass one test. Ask: does this change how much buyers want at every price? If yes, the whole curve moves. Right means more is wanted at every price, an increase in demand. Left means less is wanted at every price, a decrease in demand.
Notice that the price on the diagram did not change. It is still $4 in all three cases. Only the quantity buyers want at that price changed. That is what a shift means.
Six determinants, each with its reason
Textbooks group the determinants slightly differently. This lecture uses six.
1. Income — and why the direction depends on the good
When incomes rise, buyers can afford more. For most goods, they buy more at every price, so demand shifts right. Goods like this are called normal goods: restaurant meals, taxi rides, holidays.
But some goods are bought only because people cannot afford something they prefer. When incomes rise, buyers switch away from them. Demand for these goods shifts left when incomes rise. They are called inferior goods. "Inferior" does not mean badly made. It means buyers treat it as a second choice. The cheapest instant noodles, the cheapest supermarket rice, or a long bus journey instead of a train are common examples.
Whether a good is normal or inferior depends on the buyers, not on the good itself. For a student with very little money, bus travel may be a normal good: with a bit more income, she takes the bus more often. For a family that can now afford a car, bus travel is inferior: with more income, they ride the bus less. Economists find these answers from data, not from the name of the good. You will learn how to measure this when you meet income elasticity of demand.
2. The price of a substitute
Substitutes are goods that can replace each other: tea and coffee, buses and trains, one brand of phone and another. If the price of tea rises, coffee becomes better value by comparison. Some tea drinkers switch, so at every price of coffee, more coffee is wanted. Demand for coffee shifts right.
So the price of a substitute and the demand for the good move in the same direction. Tea price up, coffee demand up. Tea price down, coffee demand down.
3. The price of a complement
Complements are goods used together: printers and ink cartridges, cars and petrol, phones and phone cases. If printers become cheaper, more people own printers. Every printer needs ink, so at every price of cartridges, more cartridges are wanted. Demand for ink cartridges shifts right.
So the price of a complement and the demand for the good move in opposite directions. Printer price down, cartridge demand up. Car price up, petrol demand down.
Do not learn "same" and "opposite" as a slogan. Rebuild them each time from the story: substitutes compete for the same buyer, complements are bought as a team.
4. Tastes and preferences
If buyers come to like a good more, they want more of it at every price. This can come from fashion, advertising, new health information, or a product being seen on social media. Demand shifts right. Bad publicity, a health warning or a fashion moving on shifts demand left.
5. Expectations
Buyers think about the future. If they expect a good's price to rise next month, they buy more now, before the rise. Demand today shifts right. If they expect the price to fall, they wait, and demand today shifts left.
Notice the trap here. It is the expected future price that shifts today's curve. Today's price would only move buyers along it.
Expectations about income work the same way. If people fear losing their jobs in a coming recession, they cut spending now, even before their income falls. Demand for many goods shifts left.
6. The number and type of buyers
Market demand is the total of every buyer's demand, so more buyers means more demand at every price. A growing population, a new university in town, or a firm starting to export to another country all shift demand right.
The type of buyer matters too. As a population gets older, demand shifts towards health care and away from school uniforms, even if the total number of people stays the same.
Income (normal or inferior good) · the price of substitutes · the price of complements · tastes and preferences · expectations · the number and type of buyers.
Each one shifts the whole demand curve. Only the good's own price moves buyers along it.
Where does government fit?
Some textbooks list "government policy" as a separate determinant. It is more useful to see that government usually acts through one of the six. A health campaign against smoking changes tastes. A subsidy that makes electric cars cheaper lowers the price of a substitute for petrol cars. A tax cut raises people's take-home income. When an exam question mentions a policy, name the channel it works through. Your explanation becomes much clearer.
A government puts a tax on sugary drinks, and their price in shops rises. Does the demand curve for sugary drinks shift left?
Show the answer
No. For buyers, the tax shows up as a higher price of the drink itself. That is a change in the good's own price, so buyers move along the demand curve, and the quantity demanded falls. The tax works on the sellers' side of the market, which you will study as supply. A demand curve that does shift is in a different market: bottled water is a substitute, so its demand shifts right. In the Mexico case from the last lecture, purchases of untaxed drinks, mostly water, rose by about 4%. One more point: if the publicity around the tax also changes people's tastes, that is a second, separate effect, and it would shift demand for sugary drinks left as well.
Practise the reasoning
Below are eight events, each in a different market. For each one, decide what happens to the demand curve. Then read the reason, even when you are right.
Read the event. Choose what happens to the demand curve for the good named. The graph shows the result.
Eight events, the effect on the demand curve for the good named, and the reason:
| Event | Market | Effect | Reason |
|---|---|---|---|
| Incomes rise | taxi rides | right | normal good |
| Incomes rise | the cheapest instant noodles | left | inferior good for most buyers |
| Printers become cheaper | ink cartridges | right | complement |
| The price of tea rises | coffee | right | substitute |
| The price of rice rises | rice | movement along | its own price |
| Buyers expect phone prices to fall next month | phones today | left | expectations |
| A health campaign warns about sugary drinks | sugary drinks | left | tastes |
| A new university doubles the student population | bicycles in the town | right | more buyers |
When two determinants change at once
Real markets rarely change one thing at a time. Suppose incomes in a college town rise, and in the same month a new drinks shop opens with low prices. What happens to the demand for an existing bubble-tea shop's drinks?
The two changes pull in opposite directions. Higher incomes push demand right, if bubble tea is a normal good. A cheaper rival is a cheaper substitute, so it pushes demand left. The overall shift depends on which effect is bigger. Without numbers, an economist can only say "the overall effect is uncertain". That is a correct answer, not a weak one. Explore the sizes below. The scenario is invented, so the numbers are only for illustration.
Set the size of each effect at every price. Watch where the demand curve ends up.
The net shift is the income effect minus the rival's effect, at every price:
| Incomes add | Rival takes away | Net change at every price | Result |
|---|---|---|---|
| 80 | 50 | +30 | demand shifts right |
| 50 | 80 | −30 | demand shifts left |
| 60 | 60 | 0 | no overall shift |
The model leaves out other things that could change at the same time, such as tastes or the prices of other drinks.
What the model leaves out matters too. It assumes nothing else changes: not tastes, not the price of other drinks, not the number of students. Real analysis has to state assumptions like these openly.
Worked examples
Incomes fall during a recession. What happens to the demand for ready meals from supermarkets (a normal good for most buyers) and for the cheapest instant noodles (an inferior good)?
Ready meals: lower income means less spending at every price. Demand shifts left.
Cheapest noodles: buyers who can no longer afford their usual food switch to the cheapest option. More is wanted at every price. Demand shifts right.
One event, opposite results. The determinant is the same, income, but the mechanism depends on how buyers see each good.
(a) The price of games consoles rises sharply. What happens to the demand for the games played on them? (b) The price of new cars rises sharply. What happens to the demand for petrol?
(a) Consoles and games are complements. Fewer people buy the dearer consoles, so fewer people need games. Demand for games shifts left.
(b) Cars and petrol are complements, so the same reasoning applies. Fewer new cars are bought, so demand for petrol shifts left. The effect is slower, though. Most petrol is used by cars people already own.
Buyers expect a popular phone model to fall in price in three months, when the next model is released. What happens to demand for that phone today?
Many buyers decide to wait. Today's price has not changed, but less is wanted at every price today. Demand today shifts left. When the price falls later, that will be a movement along the curve, a separate step.
The policy. For many years, Norway's government made electric cars much cheaper to buy than petrol and diesel cars. Electric cars were exempt from VAT, which is 25% in Norway, and from most of the purchase taxes charged on petrol and diesel cars. (Since 2023, the VAT exemption has covered only the first part of a car's price.)
What the determinants predict. For buyers of petrol and diesel cars, an electric car is a substitute. The policy lowered the price of that substitute, so the demand curve for petrol and diesel cars should shift left. The heavy taxes on petrol and diesel cars also raised their own price. That is a separate effect: a movement along their demand curve. Both effects push in the same direction, towards fewer petrol and diesel cars.
What happened. In 2024, 88.9% of new cars registered in Norway were fully electric. New petrol cars were 0.8% of the total, and new diesel cars 2.3% (figures from the Norwegian Road Federation, OFV, published January 2025).
Verdict. The prediction held strongly. The case also shows how government works through the determinants rather than beside them. The policy changed the price of a substitute, and over time it probably changed tastes and expectations too, as electric cars became normal. Separating these effects exactly would need careful research. The direction, though, is exactly what the theory predicts.
Three classic mistakes
The price of a substitute and the demand for the good move the same way. The price of a complement and the demand move the opposite way. Many summaries print this backwards. Never trust a slogan here. Rebuild it from the story every time: dearer tea sends buyers to coffee; dearer printers mean fewer people buying ink.
That is true only for normal goods. For an inferior good, demand falls when income rises. If a question gives no clue, say which you are assuming: "assuming this is a normal good…"
A tax on a good raises its own price, so buyers move along its demand curve. The demand curves that shift are in related markets: substitutes and complements. Draw the right diagram for the right market.
For each one, name the determinant and explain the mechanism before you give the direction. Open a hint only when you are stuck.
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The price of petrol rises sharply. What happens to the demand for bicycles? What happens to the demand for large cars?
Hint 1
How is petrol related to each good? Is it used with it, or instead of it?
Hint 2
For bicycles, think of the trip, not the fuel: a bicycle trip replaces a car trip.
Full answer
Bicycles: car trips need petrol, so dearer petrol makes car trips dearer. A bicycle trip is a substitute for a car trip, so demand for bicycles shifts right. Large cars: petrol is a complement to cars, and large cars use the most. Dearer petrol makes owning one more expensive, so demand for large cars shifts left.
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Many people fear that a recession is coming next year, although their incomes have not fallen yet. What happens now to the demand for new furniture? Name the determinant.
Hint 1
Their income today is unchanged. What has changed is what they think will happen.
Hint 2
Furniture can usually wait. What do careful households do with spending that can wait?
Full answer
The determinant is expectations, about future income. Households worried about losing income delay purchases that can wait, such as furniture. Less is wanted at every price now, so demand shifts left, even before any income has actually fallen.
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A city builds a fast new metro line. The price of a metro ticket is low. What happens to the demand for taxi rides in the city, and for city-centre parking spaces?
Hint 1
For each good, ask whether the metro competes with it or works with it.
Hint 2
A metro ride replaces some car journeys. A parking space is only needed when you drive.
Full answer
The metro is a new, cheap substitute for taxi rides, so at every taxi fare fewer rides are wanted: demand for taxis shifts left. Parking spaces are a complement to driving into the centre. Fewer people drive in, so demand for parking spaces shifts left too. A third effect could pull the other way: if the metro brings more visitors into the city, some of them may still take taxis, so the size of the shift is uncertain.
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In the same year, incomes rise and a popular health report says that a breakfast cereal is unhealthy. Assume the cereal is a normal good. What happens to its demand? What would you need to know to give a definite answer?
Hint 1
Take the two changes one at a time. Which way does each one push the curve?
Hint 2
If two effects push in opposite directions, what decides the final position of the curve?
Full answer
Higher incomes push demand right, because the cereal is a normal good. The health report changes tastes and pushes demand left. The overall effect is uncertain. To give a definite answer, you would need to know the size of each effect: how many more boxes people would buy at each price because of the income rise, compared with how many fewer because of the report. Saying "uncertain, it depends on the relative sizes" is the correct economic answer.
Every determinant is really a story about people making choices with limited money, against a background of other goods and an uncertain future. Income decides what they can afford. Related goods decide what else competes for the same money. Tastes and expectations decide what they want, and when.
This is why economists talk about markets as connected. A change in one market, such as cheaper electric cars, travels into others: petrol, parking, car repairs, even electricity. Learning to follow those connections, one mechanism at a time, is most of what thinking like an economist means.
- A determinant of demand changes how much buyers want at every price, so it shifts the whole curve: right for an increase, left for a decrease.
- For a normal good, higher income shifts demand right, and for an inferior good, higher income shifts demand left.
- The price of a substitute and the demand for the good move in the same direction, and the price of a complement and the demand move in opposite directions.
- Tastes, expectations about future prices and incomes, and the number and type of buyers also shift demand.
- Government policy usually works through one of the determinants, so name the channel, and remember that a tax on a good changes its own price, which is a movement along its curve.
- When two determinants push in opposite directions, the overall shift depends on their relative sizes and may be uncertain.