The Market Mechanism

A demand factor is any change in the economy which causes the demand curve to move. At first this might seem illogical, but consider an example.

Imagine that you like to each chocolate biscuits. At the moment you are studying full time, and so the odds are that you are either working part time, or perhaps not at all. As a result, your income is lower than it will be later in your life. After you finish studying, you will probably get a job, and at that time your income will increase. What will happen to the number of chocolate biscuits that you buy?

If you still like the same biscuits at that time, then the odds are that you will buy more of them. Despite the fact that the price has not changed, you are willing to purchase a larger number of biscuits. We refer to this situation as an increase in demand. When this happens, the entire line will shift to the right. This suggests that at any given price, the quantity demanded has increased.

There are also factors which could result in a decrease in demand. When this happens, we find that at any given price, the quantity demanded has decreased. On these occasions, the demand curve will shift to the left.

There are many factors which could cause the demand curve to shift. For example, we have already established that when people receive more money as income, they will probably buy more of the things that they like. Demand can also increase when people feel more confident about their economic situation, or when the interest rate that they need to pay to borrow money is lower. Another factor which can have an impact is the value of the Australian dollar. When our dollar is low, people from overseas are more likely to purchase our goods and services. This could act to increase the demand for the things that we export.

A decrease in demand will occur when the opposite situation arises; if interest rates go up, people become less confident or when the value of the Australian dollar appreciates.

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