Shifts of the Demand Curve

Although natural gas prices in 2006 were higher than they had been in 2002, U.S. consumption of natural gas was higher in 2006. How can we reconcile this fact with the law of demand, which says that a higher price reduces the quantity demanded, other things equal?

The answer lies in the crucial phrase other things equal. In this case, other things weren’t equal: the U.S. economy had changed between 2002 and 2006 in ways that increased the amount of natural gas demanded at any given price. For one thing, the U.S. economy was much stronger in 2006 than in 2002. Figure 3-2 illustrates this phenomenon using the demand schedule and demand curve for natural gas. (As before, the numbers in Figure 3-2 are hypothetical.)

An Increase in Demand A strong economy is one factor that increases the demand for natural gas—a rise in the quantity demanded at any given price. This is represented by the two demand schedules—one showing the demand in 2002 when the economy was weak, the other showing the demand in 2006, when the economy was strong—and their corresponding demand curves. The increase in demand shifts the demand curve to the right.

The table in Figure 3-2 shows two demand schedules. The first is the demand schedule for 2002, the same as shown in Figure 3-1. The second is the demand schedule for 2006. It differs from the 2002 schedule because of the stronger U.S. economy, leading to an increase in the quantity of natural gas demanded at any given price. So at each price the 2006 schedule shows a larger quantity demanded than the 2002 schedule. For example, the quantity of natural gas consumers wanted to buy at a price of $3 per BTU increased from 10 trillion to 12 trillion BTUs per year; the quantity demanded at $3.25 per BTU went from 8.9 trillion to 10.7 trillion, and so on.

Pay More, Pump Less

For a real-world illustration of the law of demand, consider how gasoline consumption varies according to the prices consumers pay at the pump. Because of high taxes, gasoline and diesel fuel are more than twice as expensive in most European countries and in many East Asian countries than in the United States. According to the law of demand, this should lead Europeans to buy less gasoline than Americans—and they do. As you can see from the figure, per person, Europeans consume less than half as much fuel as Americans, mainly because they drive smaller cars with better mileage.

Prices aren’t the only factor affecting fuel consumption, but they’re probably the main cause of the difference between European and American fuel consumption per person.

Source: World Development Indicators and U.S. Energy Information Administration, 2013.

A shift of the demand curve is a change in the quantity demanded at any given price, represented by the shift of the original demand curve to a new position, denoted by a new demand curve.

What is clear from this example is that the changes that occurred between 2002 and 2006 generated a new demand schedule, one in which the quantity demanded was greater at any given price than in the original demand schedule. The two curves in Figure 3-2 show the same information graphically. As you can see, the demand schedule for 2006 corresponds to a new demand curve, D2, that is to the right of the demand schedule for 2002, D1. This shift of the demand curve shows the change in the quantity demanded at any given price, represented by the change in position of the original demand curve D1 to its new location at D2.

A movement along the demand curve is a change in the quantity demanded of a good arising from a change in the good’s price.

It’s crucial to make the distinction between such shifts of the demand curve and movements along the demand curve, changes in the quantity demanded of a good arising from a change in that good’s price. Figure 3-3 illustrates the difference.

Movement Along the Demand Curve versus Shift of the Demand Curve The rise in quantity demanded when going from point A to point B reflects a movement along the demand curve: it is the result of a fall in the price of the good. The rise in quantity demanded when going from point A to point C reflects a shift of the demand curve: it is the result of a rise in the quantity demanded at any given price.

The movement from point A to point B is a movement along the demand curve: the quantity demanded rises due to a fall in price as you move down D1. Here, a fall in the price of natural gas from $3.50 to $3 per BTU generates a rise in the quantity demanded from 8.1 trillion to 10 trillion BTUs per year. But the quantity demanded can also rise when the price is unchanged if there is an increase in demand—a rightward shift of the demand curve. This is illustrated in Figure 3-3 by the shift of the demand curve from D1 to D2. Holding the price constant at $3.50 per BTU, the quantity demanded rises from 8.1 trillion BTUs at point A on D1 to 9.7 trillion BTUs at point C on D2.

When economists say “the demand for X increased” or “the demand for Y decreased,” they mean that the demand curve for X or Y shifted—not that the quantity demanded rose or fell because of a change in the price.

PITFALLS

PITFALLS: DEMAND VERSUS QUANTITY DEMANDED

DEMAND VERSUS QUANTITY DEMANDED
When economists say “an increase in demand,” they mean a rightward shift of the demand curve, and when they say “a decrease in demand,” they mean a leftward shift of the demand curve—that is, when they’re being careful. In ordinary speech most people, including professional economists, use the word demand casually. For example, an economist might say “the demand for air travel has doubled over the past 15 years, partly because of falling airfares” when he or she really means that the quantity demanded has doubled.

It’s OK to be a bit sloppy in ordinary conversation. But when you’re doing economic analysis, it’s important to make the distinction between changes in the quantity demanded, which involve movements along a demand curve, and shifts of the demand curve (See Figure 3-3 for an illustration). Sometimes students end up writing something like this: “If demand increases, the price will go up, but that will lead to a fall in demand, which pushes the price down . . .” and then go around in circles. If you make a clear distinction between changes in demand, which mean shifts of the demand curve, and changes in quantity demanded, which means movement along the demand curve, you can avoid a lot of confusion.