Shift in demand is caused by the four main factors. The changes in the taste and consumer’s preference, the changes in consumer’s income, changes in prices for substitutes and complimentary goods, and speculation or changes in consumers expectation. To properly understand the concept of demand shift we have to first make assumptions that the prices of any commodity that we will use as an example remain constant throughout the period of observation.
To explain the effects of consumers income on demand curve. We will take two commodities one that is highly priced (gold or diamond) and causes significant changes to the consumer’s budget and the other one that is lowly priced (basic foodstuff) and causes negligible changes to the consumer’s budget. We assume that that consumer’s income increases or decreases and the prices for the two goods remain the same. The increase in consumer’s income will expand his/her budget and will therefore be able to accommodate more of the highly priced commodity in his/her budget. The demand for the highly priced commodity will increase as prices remains constant resulting to an upwards shift in the demand curve. If the consumer’s income decreases the consumer’s budget is restrained and can only allow for limited quantity of the highly priced product to be bought. The implication of this is that the demand curve will shift downwards. The high priced product will therefore be categorized as a normal good because it reacts negatively and positively to increase or decrease in consumer’s income. When we look at the movement of the demand curve due to increase or decrease in consumer’s income under the low priced goods we will see that there is a decrease in the amount purchased as the consumer’s income increases. The demand shifts downwards with increase in consumer’s budget and the demand shift upwards with decrease in consumer’s income. Such a good is referred to as inferior goods. The consumer will only buy them under limited budget.
An illustration to changes in tastes and preference can be seen in the prices for clothing that are in fashion or tablets in the market. When the preference for a particular tablet increase the demand for that tablet will increase as well and will shift the demand curve upwards. When the tablet losses its preference and consumers shift their taste to another type of tablet in the market the demand curve for the tablet will reduces resulting to a downward shift in demand curve.
The shift that is caused by changes in prices of related goods can be illustrated by taking two complimentary products and two substitute products. We take an example of a car and fuel as complimentary products and beef and pork as substitute. When the demand for cars goes up the demand for fuel will also go up without any changes in the prices of either product. A reduction in the demand for cars will also reduce the demand for fuel making the demand curve for fuel to shift downwards. For substitute product the increase in demand for pork will reduce the demand for beef making the demand curve for beef to shift downwards. Reduction in the demand for pork will have an upwards effect on the demand curve for beef.