Demand Curves

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

According to Wikipedia demand is “an economic principle that describes a consumer's desire, willingness and ability to pay a price for a specific good or service… refers to how much (quantity) of a product or service is desired by buyers.” The demand for a product as well as its price may vary due to several possible changes in certain variables (price determinants and non-price determinants).

The demand curve (“graph depicting the relationship between the price of a certain commodity and the amount of it that consumers are willing and able to purchase at that given price.”^[1]) can subsequently respond to the changes in demand with two different movements: Shift to the left, which represents a decrease in the demand at every price or a shift to the right, which signifies an increase in the demand for a product at each price.

There is one specific variable capable of causing a movement along the already existing demand curve and it is the price of the given product. This is because the demand for whatever is being supplied is inversely proportional to its cost, meaning that as the price rises the demand lowers and vice versa.

The ceteris parabus is a “method” stated by the Law of Demand we use to make the inverse proportion previously referred to function. This Law of Demand further explains the concept of the cost of a product affecting its demand by outlining the influence the income and the substitution effect have on the economic impact of a product. The income effect refers to the increase in popularity of a certain good whose price has fallen, and thus attracts buyers, who can now more easily afford to buy more of the product. On the other hand, the substitution effect also originates from a fall in price, which makes the product more desirable, but is specific about how this decrease in cost makes it more attractive to costumers than other similar, more expensive products. An example of a substitution effect would be the price of Nike trainers decreasing, allowing more costumers to afford them, and thus attracting them to buy the product instead of other similar, more expensive brands. Any variation in demand produced by the price determinants will as a result cause a movement along the demand curve.

On separate terms, we may expand on non-price determinants and their effects on the demand curve by stating that the many complex variations  (usually linked to microeconomics) do not include changes in the price of the given product.  Some general factors that may affect this shift include: the age structure of a population, it´s size, variations in income distribution, government policy changes and seasonal changes (clothing) and other, more complex variables such as the specific costumer preferences (brands, quality), variations in the buyer´s income, competition between similar products and an increase in demand for a good, which needs a complementary product (Bicycles need tires made from rubber, so their price depend of that of rubber production.).

In conclusion we can determine the effect that each type of change will have on the demand curve of a certain product by understanding whether it is a variation in price, which will lead to a movement along the curve, according to the income and substitution effects, or a change in any other possible factor, leading to a left or right shift of the demand curve which represents the influence of more complex, external factors on the demand of a product.

1-http://en.wikipedia.org/wiki/Demand_curve

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

Several diverging factors should be taken into consideration when referring to the causes of an increase in a product´s demand. However, there are two ways to visually represent the effects these factors can have on the demand curve. These are: a shift to the right of the curve due to external factors, or the rise of demand along the curve (movement within) as a consequence of a decrease in cost.

When referring to bicycles specifically, it is possible to achieve a variation in the demand curve due to factors such as competition and substitution. If the production of primary goods to building other mediums of transport increases in price, the whole final product´s price will increase too affecting the investment costumers are willing to apply. If this happens, then the more economic alternative (bicycles) will grow more popular and demand for it will rise. Because this symbolizes an increase in demand at every given price, the demand curve would shift to the right as shown in the graph:

There are many factors that could affect the demand for bicycles both positively or negatively.  These factors, and the ones stated before, link directly to the idea of the two different effects, income and substitution. This is merely because the production of bicycles, as mentioned in the previous question, relies on the price and production of other primary materials such as aluminum and rubber. If for any reason the price of any of these primary materials decreases, the production of bicycles (final product) in general would become far less expensive and would increase the “real income” of consumers now attracted to the more affordable product. The decrease in price will affect the demand for the product positively and vary the curve´s structure are shown in the graph below:

In conclusion, several possible determinant factors may affect in different ways the demand curve for a popular product such bicycles as their production and supply are analyzed and expanded into a more complex comprehension of their balance.

Ana Gabriela Gonzalez