Hello All,
I had this conversation with my cousin, who is studying Econ recently. When we say, the demand increased, why wouldn’t we consider the the point A in my figure 1 below? Why do we say that when the demand increased, the demand curve shifts right, as in figure 2 below? I was not able to answer this question, so I thought of asking this question to the experts.
I would appreciate your help. The image is below.
When we move along the demand curve (with the curve itself remaining unchanged), we say that there is a change in the quantity demanded. When the curve itself moves, we say that there is a change in demand. That’s merely the definition of those two phrases. If your cousin is studying Econ, he or she should know this.
Thanks S2000magician. I am sorry for not providing the context. My cousin is studying Econ101. It’s a basic level course, and his first introduction to the world of econ/finance. He took this course after I told him how interesting the world of Economics and Finance is.
I told him the exact same reply what you have written, but he was curious to know why is it that when we say the demand has increased, we don’t say that the prices have gone down, as in figure 1 i.e. why isn’t it that we say that we are moving along the curve vs. moving the curve? This was a bit confusing for me too.
I would appreciate if you could help us. I am new to Econ and Fin as well. I opened an econ book for the first time in my life when I started studying for the CFA.
Thanks in advance.
Think how the line is plotted.
Quantity demanded (Qd) is a function of price § , the customers’ income (I), and the price of related goods: (P1, P2 etc)
Qd = f ( P, I, P1, P2, …)
for example Qd = -P + I + P1 - P2
When you draw a graph with 2 axes, you can only have 2 variables, so we use Price and Demand, and hold the other inputs as constant, so (for simplicity, assuming straight line) Qd = aP + b for some constants a (coeficient of P) and b (all other variable brought into one constant). That is the equation of the demand line… with Qd as the horizontal axis and P as the vertical axis. If you change P, then you move along the line.
The line will only change position if something other than P and Qd changes:
I ==> customers’ income changes
P1, P2, … ==> price of related goods change
the function f itself ==> fundamental relationship between all the variables changes
There’s not necessarily a lot of logic that underlies the language we use. In mathematics we describe a function as “increasing” even if it levels out for a while; as long as it’s not going down anywhere, it’s increasing. (If we want to say that it’s not going down anywhere and it’s not level anywhere – that it’s always going up – then we say that it’s _ strictly _ increasing.)
So . . . some time in the distant past economists had to come up with some language to mean moving along an unchanging demand curve, and some language to mean that the demand curve was changing. They chose to use the phrases “change in the quantity demanded” and “change in demand”, respectively. No irrefutable logic; just a choice.
Thank you S2000magician!
You’re welcome.