Explain the sources (causes) of shifts in demand and their effects on equilibrium price and quantity exchanged.
or
How does a favourable change in taste affect the market price and the quantity exchanged?
(i) Change in price of related goods (substitute/complementary) in consumption. Take the example of two substitute goods tea and coffee. If price of coffee rises, demand for its substitute tea will also rise causing rightward shift of demand curve for tea. Effect on price and quantity? The price of tea and its quantity exchanged will increase. Now take two complementary goods tea and sugar. If price of tea goes up, demand for sugar (along with tea) will fall causing leftward shift of demand curve for sugar. Effect? Price of sugar and its quantity exchanged will decrease.
(ii) Change in Income. When aggregate income of an economy rises, (i) demand for normal goods will increase (i.e., more demand at same price) and shift the demand curve rightwards but (ii) demand for inferior goods will fall and shift its demand curve leftwards. Effect? The price and quantity exchanged of a normal good will increase but those of an inferior good will fall. Reverse of it will happen if aggregate income of an economy falls.
(iii) Change in Taste. The latest medical research has proved that mustard oil (Sarson ka Tael) is the best oil for heart patients for maintaining a healthy heart. A sudden spurt or increase in demand for mustard oil will shift the market demand curve to the right. Effect? The price and quantity purchased and sold of mustard oil will increase. The opposite will happen if there is unfavourable change in taste due to some reasons, i.e., in that case price and quantity exchanged of the commodity will decrease.
(iv) Change in number of consumers in the market. An increase in population or number of consumers will shift rightward the market demand curve for a commodity. Effect? The price and quantity exchanged of the commodity will rise. On the contrary, a decrease in population will shift leftward the market demand curve which will result in fall in price and quantity exchanged.
