Determinants of demand: shifts vs movements

Detail

A. What "demand" means first

• Demand means how much of a good buyers are willing and able to buy at each price, in a given period.
• Purchasing power means the ability to pay for goods.
• Class 9 defines demand as desire backed by purchasing power.
• A want with no money behind it is not market demand.
• Example: very poor people need housing but cannot pay for it. Their need does not show up as market demand.

• So a market can leave basic needs unmet. This is why governments provide housing, food and health.

• Two meanings of purchasing power:

• Micro sense: the buyer's ability to pay. This note uses this meaning.

• Macro sense: Class 9's margin definition, "what one unit of currency can buy at a particular time", which is the value of money. It falls when there is inflation.

• Needs vs wants (Class 7):

• Needs are what we must have, such as food, clothing and shelter.
• Wants are what we would like to have.

• Either one becomes market demand only when money stands behind it.

• Scale of household spending in India: the average MPCE (monthly per capita consumption expenditure, meaning what one person in a household spends in a month) was ₹4,122 in rural India and ₹6,996 in urban India (2023-24) [2][3].

• These figures come from 2,61,953 households surveyed by MoSPI in the Household Consumption Expenditure Survey (HCES) 2023-24 [3].

B. The demand function

• Demand function: Dₓ = f(Pₓ, Pᵣ, Y, T, N, S, E)
• Pₓ = the good's own price
• Pᵣ = prices of related goods
• Y = consumer income
• T = tastes and preferences
• N = population (size and composition)
• S = season

• E = expected future prices

• Key rule: a change in Pₓ alone causes a movement along the curve. A change in any other factor causes a shift of the curve.

C. Determinant 1: Prices of related goods

• Related goods are goods whose demand is linked. A change in the price or supply of one changes the demand for the other.

(a) Substitute goods

• Substitute goods can replace each other. Examples: tea/coffee, mango/banana, AC/cooler.
• Demand for a good moves in the same direction as the price of its substitute.

• Coffee price rises → people switch to tea → tea demand rises → tea's demand curve shifts right.

• Cross-price elasticity measures how strongly one good's demand reacts to another good's price:

• Eₓᵧ = % change in quantity demanded of X ÷ % change in price of Y
• For substitutes, Eₓᵧ is positive (> 0).
• Worked example: coffee price rises from ₹100 to ₹120 (+20%). Tea bought rises from 50 to 55 cups (+10%). Eₓᵧ = 10 ÷ 20 = +0.5, so the two are substitutes.

(b) Complementary goods

• Complementary goods are used together.
• Class 12 examples: tea/sugar, shoes/socks, pen/ink.

• Class 9 examples: smartphone/earphones, cars/petrol, printers/cartridges, movie tickets/cinema popcorn.

• Demand for a good moves opposite to the price of its complement.

• Sugar price rises → tea becomes costlier to drink → tea demand falls → tea's curve shifts left.

• Movie tickets become costlier → fewer cinema visits → popcorn demand falls.

• For complements, Eₓᵧ is negative (< 0).

• Worked example: petrol price rises 25%. Car demand falls 5%. Eₓᵧ = −5 ÷ 25 = −0.2, so the two are complements.

• If Eₓᵧ = 0, the goods are unrelated. Example: tea and shoes.

D. Determinant 2: Consumer income

• Consumer income is the money income a household has.
• Assume prices do not change. When income rises:
• a normal good's curve shifts right. A normal good is one whose demand rises with income.
• an inferior good's curve shifts left. An inferior good is one whose demand falls as income rises, because people move to better options.

• Inferior-good examples: coarse grains, cheap cloth.

• Income elasticity of demand: Eᵧ = % change in quantity demanded ÷ % change in income

• Eᵧ > 0 means a normal good. Eᵧ < 0 means an inferior good.

• Worked example: income rises 10%. Coarse grain bought falls 4%. Eᵧ = −4 ÷ 10 = −0.4, so coarse grain is an inferior good. Over the same rise, if milk bought rises 8%, Eᵧ = +0.8, so milk is a normal good.

• Trap (Class 9): "An increase in income always leads to a rise in demand."

• This is false. Demand for inferior goods falls when income rises.

• Evidence from India, 2023-24:

• Food's share of household spending was 47.04% in rural India and 39.68% in urban India [2][3].
• Non-food's share was 52.96% (rural) and 60.32% (urban) [3].
• Urban households spend more per person and put a smaller share into food. This is how income changes what people buy, not only how much they buy.

E. Determinant 3: Tastes and preferences

• Tastes and preferences are what buyers like. Habit, fashion, advertising, health news and culture all shape them.
• Ice-cream demand shifts right in summer.
• News that cold drinks may harm health shifts their demand left.
• Srivalli does not switch to oranges even when they are cheaper. A strong personal preference can outweigh a price difference.

F. Determinant 4: Population size and composition

• Population size and composition: how many people there are, and their age mix. Size affects the level of demand. Composition affects the type of demand.
• Size:
• India is the most populous nation (NCERT). Its growth relies on domestic demand.

• The UN puts China and India at about 1.4 billion people each, the two most populous countries in the world [5].

• Composition, using shoes as the example:

• more children → more sports shoes;
• more working adults → more formal shoes;

• more elderly people → more orthopaedic or comfort shoes.

• Number of buyers: market demand is the sum of all individual demands. More buyers shift the market demand curve right, even when each person's demand stays the same.

G. Determinant 5: Seasonality

• Seasonality means demand that changes with weather, festivals and habits, not with price.
• Examples:
• Bookshops get crowded when the academic session starts.
• Sweet sales rise at festivals.
• Woollen clothes sell in winter.

H. Determinant 6: Future price expectations

• Future price expectations are what buyers think prices will be later.
• Expect a price fall → buyers postpone purchases → demand today falls → the curve shifts left.

• People delay buying durables (long-lasting goods such as TVs and fridges) until Diwali or New Year sales.

• Expect a price rise → buyers advance purchases → demand today rises → the curve shifts right.

• Sellers react in the same way. Potato wholesalers hold back stock when they expect higher prices.
• How the RBI tracks expectations:
• The RBI runs a bi-monthly Inflation Expectations Survey of Households (IESH) in 19 major cities, using urban households [4].
• It gives directional information on near-term price pressure, and the answers may reflect respondents' own spending patterns [4].
• The January 2025 round collected 6,096 valid responses. Women were 55.4% of respondents [4].
• Expectations matter for policy because people who expect higher prices buy early. This pushes demand, and prices, up today.

I. Movement along vs shift of the demand curve

	Movement along the demand curve	Shift in demand curve
Cause	Change in the good's own price only	Change in income, related prices, tastes, population, season or expectations
Name	Extension (price falls → more bought) / Contraction (price rises → less bought) of quantity demanded	Increase (shift right) / Decrease (shift left) in demand
Graph	Same curve, new point	New curve

• Movement along the demand curve: quantity demanded changes only because the good's own price changed. All other factors stay the same (ceteris paribus, meaning "other things remaining the same").
• Shift in demand curve: the whole curve moves right or left because a factor other than own price changed.
• Watch the words:
• "Change in quantity demanded" means a movement along the curve.

• "Change in demand" means a shift of the curve.

• Worked example: tea

• Movement: tea price falls from ₹10 to ₹8 a cup. Cups bought rise from 5 to 7 a day. This is an extension on the same curve.
• Shift: tea stays at ₹10, but coffee becomes costlier. Cups bought rise from 5 to 8 at the same ₹10. The whole tea curve shifts right. This is an increase in demand.
• Shift left: sugar becomes costlier. At ₹10, tea bought falls from 5 to 3 cups. This is a decrease in demand.

J. Exercise drill (Class 9): petrol price doubles

Good	Effect on demand	Reason
Diesel cars	Rises (shift right)	Substitute fuel and substitute car
Electric vehicles	Rises (shift right)	Substitute
Car accessories	Falls (shift left)	Complement to car use
Public transport	Rises (shift right)	Substitute for private driving
Petrol itself	Contraction (movement along the curve)	Change in its own price

• The last row is the exam trap. Petrol's own price changed, so petrol shows a movement along its curve. All the related goods show shifts.

Prelims Hooks

• A change in a good's own price causes a movement along the curve (extension or contraction). A change in any other determinant causes a shift (increase or decrease).
• Substitutes: a rise in Y's price shifts X's demand right, and cross-price elasticity is positive. Complements: it shifts X's demand left, and cross-price elasticity is negative.
• "A rise in income always raises demand" is false. Demand for inferior goods (coarse grains, cheap cloth) falls, and income elasticity is negative.
• Class 9 defines demand as desire backed by purchasing power. An unfunded need, such as housing for the very poor, is not market demand.
• Expecting a price fall reduces demand today, because buyers postpone purchases. Expecting a price rise increases demand today.
• HCES 2023-24 (MoSPI): average MPCE was ₹4,122 (rural) and ₹6,996 (urban). Food's share was 47.04% (rural) and 39.68% (urban) [2][3].
• The RBI's Inflation Expectations Survey of Households is bi-monthly and covers 19 cities [4].
• Petrol price doubles: EVs, diesel cars and public transport see demand rise (substitutes), while car accessories see demand fall (complement).

Mains Points

• Markets and unmet needs (GS-III): markets respond only to demand backed by purchasing power. Needs such as housing, nutrition and health for the poor stay unmet. This is the case for state action, such as PDS and subsidised housing.
• Demographics shape demand (GS-III): India's size [5] supports growth driven by domestic consumption. Its changing age mix alters what people buy, from school goods to formal wear to elder care. Firms and planners must read composition, not just size.
• Expectations and inflation control (GS-III): buyers who expect higher prices buy early, and sellers hoard. This can make inflation feed itself. The RBI tracks household expectations through the IESH [4] and uses them in policy, because managing expectations can dampen demand-pull pressure.
• Income and what people buy (GS-III): higher incomes shift spending from food and inferior goods toward non-food goods and services. Food's share was 39.68% in urban areas against 47.04% in rural areas (2023-24) [3]. This has implications for farm-sector demand, the CPI basket's weights and targeting of welfare schemes.