Demand

A substitute good is a good that can be used in place of another to satisfy the same want (1) — for example tea and coffee; a rise in the price of one tends to increase the demand for the other (1).

A movement along a demand curve (2 marks) is caused by a change in the price of the good itself — the consumer moves to a different point on the same curve (an extension or contraction in demand). A shift of the demand curve (2 marks) is caused by a change in a condition of demand other than price — such as income, tastes or the price of a related good — which moves the whole curve left (decrease) or right (increase).

Petrol and cars are complements — they are used together — so the price of petrol affects the demand for cars. When the price of petrol rises, the overall cost of owning and running a car increases, because drivers must pay more to fuel it. This makes cars less attractive to buy, so some consumers decide not to buy a car or to delay buying one. As a result, the demand for cars falls at every price, and the demand curve for cars shifts to the left (a decrease in demand). With lower demand, car sellers may sell fewer cars and, depending on supply, the price of cars may fall too. The key economic point is that the price of a complement moves the demand for the related good in the opposite direction — petrol dearer, cars demanded less.

Demand for smartphones can rise for several reasons, each shifting the demand curve to the right. Factor 1 — higher incomes. Smartphones are a normal good, so when consumers' incomes rise they can afford more (and better) phones, so demand increases at every price. Factor 2 — a change in tastes/technology. A new, fashionable model or a successful advertising campaign makes smartphones more desirable, or new apps make them more useful, so more consumers want one — again raising demand at every price. In both cases more is demanded at each price, so the whole demand curve shifts right (from D1 to D2). Neither factor is the price of smartphones themselves — they are conditions of demand — which is why they shift the curve rather than cause a movement along it.

A fall in incomes reduces demand for many goods, but not for all. Why demand falls for many goods: most goods are normal goods, so when incomes fall consumers can afford less and demand falls — the demand curve shifts left. This is especially true for luxuries (holidays, new cars), which people cut back on first when money is tight. Why demand may NOT fall for all goods: for inferior goods — cheaper, lower-quality alternatives such as basic foods, second-hand goods or bus travel — a fall in income causes consumers to switch towards them from more expensive options, so demand for inferior goods actually rises. Judgement: a fall in incomes does not reduce demand for all goods. It reduces demand for normal and luxury goods but increases demand for inferior goods, as consumers trade down. So whether demand rises or falls depends on whether the good is normal or inferior, which means the statement is wrong as a general claim — the effect differs by type of good.

Changes in taste matter, but whether they are the most important cause of changes in demand is debatable. Why tastes might be most important: consumer tastes and fashion strongly affect what people buy — a product that becomes fashionable (through advertising, trends or social media) can see demand rise sharply, while a product that goes out of fashion can collapse, regardless of its price. Why other factors might be more important: income is arguably more fundamental, because consumers need the ability to pay — in a recession, demand for many goods falls whatever the fashion; the prices of substitutes and complements also shift demand strongly; and the good's own price changes quantity demanded directly. For essential goods, taste matters little. Judgement: changes in taste are an important cause of changes in demand, especially for fashionable or branded goods, but they are not always the most important — for many products income and the prices of related goods matter as much or more, and for essentials taste is minor. So the most important cause depends on the type of product: tastes dominate for fashion goods, while income and related prices dominate for many others. Therefore taste is not universally the most important cause.