Hypothetical Industry Demand Curve for New Domestic Automobiles

The parameter estimate (slope coefficient) for the automobile demand curve reveals that a $1 increase in the price of new automobiles will decrease the quantity demanded by 500 units. Thus, a decline in quantity demanded of 500 autos follows a $1 increase in price.

Average price per auto ($ thousands)

Quantity of new automobiles (millions)

change in the quantity demanded

Movement along a given demand curve reflecting a change in price and quantity shift in demand

Switch from one demand curve to another following a change in a nonprice determinant of demand

Equation 4.5 and Figure 4.1. If D8% is the appropriate demand curve, then 8 million new domestic automobiles can be sold at an average price of $25,000, whereas 10 million automobiles could be sold at an average price of $16,000, but only 6 million automobiles can be sold at an average price of $29,000 This variation is described as a change in the quantity demanded, defined as a movement along a single given demand curve. As average price drops from $29,000 to $25,000 to $2,100 along D8%, the quantity demanded rises from 6 million to 8 million to 10 million automobiles. A change in the quantity demanded refers to the effect on sales of a change in price, holding constant the effects of all other demand-determining factors.

A shift in demand, or switch from one demand curve to another, reflects a change in one or more nonprice variables in the product demand function. In the automobile demand-function example, a decrease in interest rates causes an increase in automobile demand, because the interest rate parameter of -1 million indicates that demand and interest rates are inversely related— that is, they change in opposite directions. When demand is inversely related to a factor such as interest rates, a reduction in the factor leads to rising demand and an increase in the factor leads to falling demand.

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