Shifts in Demand

Shifts in Demand

The analysis in the previous section has referred to price movements,
‘all other factors remaining unchanged’. But what factors other
than price have an important influence on market demand and how
do they affect the theory being developed here?
For any one commodity, a whole range of other factors can be
listed.World demand for coffee, for example, is affected by changes
in consumers’ incomes, by industry advertising, by collective fashions,
tastes and preferences, by competition from alternatives or
complementary goods, perhaps even by global changes in the
climate. Whatever the price of coffee, if any of these other factors
changes it will cause – to a great or lesser extent – a shift in demand.
Suppose, for example, the International Coffee Organisation
sponsored a successful, world-wide advertising campaign to
promote the consumption of coffee. Then, whatever the going
Box 2.4 Price-inelastic demand
You should be able to see that whereas goods and services that
are price sensitive have a ratio of price-elasticity greater than 1,
goods for which there are no or few substitutes will have a priceelasticity
of less than 1. For example a 400 per cent increase in
the world price of oil in January 1974 let to a minimal reduction
(say 6 per cent) in demand. That gives a ratio of 6/400 or 0.015!
Conversely, a steep demand curve illustrates ceteris paribus a
less responsive or inelastic relationship to a price change (Box 2.4).
© 2004 Tony Cleaver
market price, we can expect that many more consumers would enter
the market and buy coffee. In Figure 2.8 at price P1, for example,
demand shifts from quantity Q1 to Q2.
Demand for coffee can change for any number of reasons, therefore.
A contraction (or extension) in demand caused by an increase
(or decrease) in price is illustrated by a movement along the
demand curve. A fall (or rise) in demand caused by any
other exogenous change is illustrated by a shift in the whole curve
(Boxes 2.5 and 2.6).
Box 2.5 Endogenous and exogenous changes
A two-dimensional diagram can only illustrate the interactions
between two variables – in this case, the effect of price on
demand. In this particular example, an increase in price is an
endogenous change, that is to say within the dimensions of the
model, and its effect can be studied on the dependent variable:
causing a fall in demand illustrated by a contraction along the
demand curve. A change in some other factor outside the
model, in this example advertising, is an exogenous change and
this causes the relationships between the two original variables
to shift. The distinction between endogenous (internal) and
exogenous (external) changes is important and will be referred
to continually through this text.
Price
P1
D2
D1
0 Q1 Q2
Quantity
Figure 2.8 A demand shift.
© 2004 Tony Cleaver
Market Supply
The incentive for any business to supply goods to market is to make
profits – to sell his/her product at a higher price than the COSTS OF
PRODUCTION involved in offering it for sale. Whether it be a personal
service, such as providing haircuts, the assembly of a luxury motor
Box 2.6 Coffee prices: part 1
All this analysis may seem a bit pedantic but, as you will see
later on, it is actually important in separating out causes and
effects of major crises in world markets. A quick example should
help explain. Coffee is (after oil) the world’s second most important
traded commodity. The livelihood of 25 million small
producers and more than half-a-billion other people linked to
the coffee trade in poor countries is directly influenced by the
price of coffee. At the time of writing, the world price of coffee is
close to a 100-year low – depressing the incomes, and lives, of
millions. Additionally, prices over the last twenty years have been
very volatile – hurting particularly the smaller farmer who cannot
insure against risk.
Is the price low because world demand is low or has some
other factor caused the slump in prices? And what causes the
sudden and great reversals in prices and fortunes? This is not an
insignificant matter.