Change in quantity demanded
It is a change that occurs as a result of a change in the price of a commodity; and it necessitates (involves) a movement along the same demand curve, either upward or downward.
If there is an increase in a price of a commodity, the quantity demanded will fall. If there is a decrease in its price, the quantity demanded will increase. This is illustrated graphically in figure 21.
You should note that it is only one factor, the price of the commodity, that causes a change in quantity demanded. And it does not lead to a shift of the demand curve but only a movement along the same demand curve. The rising arrow indicates increasing price, increase in price from P1 to P3 and a fall in quantity demanded from Ql to Q3.
While the downward – looking arrow indicates a fall in price: a decrease from P1 to P2 and a rise in quantity demanded from Ql to Q2. Thus a change in quantity demanded necessitates only one demand curve and a movement along the same demand curve.
Change in demand
It is a change that occurs as a result of a change in certain factors, like income, population, new technology, taste, prices of other goods, etc that influence (affect) demand. And it causes the demand curve to shift from one position, D1, to another, D2 (outward), or to D3 (inward) as shown in figure 22. That is, it causes the demand curve to shift either outward or inward.
The initial curve is D1. Due to a change, probably increase in income, D1 shifted to D2 and quantity demanded increased to OQ2. At another time, it shifted to D3; this might be due to a decrease in population or income. And the quantity demanded decreased to OQ3.
A shift of demand curve to the right (outward) implies increase in demand; whereas its shift to the left (inward) implies a decrease in demand. We outline below some of the factors that cause either inward or outward shift of a demand curve:-
Causes of inward and outward shift of demand curve
Causes of its inward shift
- A fall in income.
- A rise in price of a complement.
- A fall in supply of the commodity.
- A fall in population or number of consumers.
- A rise in price of the commodity.
- Others: the negative aspects of other factors that affect demand cause its inward shift.
Causes of its outward shift
- An increase in income.
- A rise in price of a substitute.
- Increase in supply of the commodity.
- A rise in population or number of consumers.
- A fall in price of the commodity.
- Their positive aspects cause its outward shift.
It is the quantity demanded of a commodity that determines price and not quantity supplied per se (by itself alone) if equilibrium price is ignored. For instance, in figure 23 below, the price should be OP1 and not OP2.
Government can influence aggregate (total) demand in the following ways:
Positive influence (to increase demand in order to eliminate or reduce deflation – economic slump)
- Decrease in direct taxes.
- Decrease in indirect taxes.
- Increase in money supply.
- Creation of employment opportunities (jobs).
- To increase workers’ salary, wages and fringe benefits, e.g. allowances.
- To fix maximum prices (price control) for important goods and services.
- To increase supply of important goods, especially food items and fuel.
- Budget deficit, i.e to raise government expenditure over its revenue.
- Granting subsidies, i.e. to reduce cost of important goods and services.
- Increase in importation of essential goods from non-inflationary countries.
- Efficient distribution of goods and services to all parts of a country.
- Even distribution of income: taking from the rich and give to the poor through government policies, e.g. taxation.
Negative influence (to decrease demand in order to control inflation)
- Increase in direct taxes.
- Increase in indirect taxes.
- Decrease in money supply.
- Retrenchment of workers, embargo on employment.
- Salary freeze, elimination of allowances.
- Elimination of price control. (It reduces demand but not a good remedial measure of inflation)
- To decrease supply of important goods and services.
- Budget surplus.
- Eliminate or reduce subsidies.
- Decrease in importation of scarce commodities.
- Inefficient distribution of goods and services.
- Increase in the wage gap – ignoring inequality of income in the society.