9781118041581

Determinants of Demand 81

Starting from an initial price, by varying the coach fare up or down, we

move along(respectively up and down) the demand curve. A higher price

means lower sales. But what happens if there is a change in one of the other

factors that affect demand? As we now show, such a change causes a shift in the

demand curve.To illustrate, suppose that a year from now Pis expected to be

unchanged but Y is forecast to grow to 119. What will the demand curve look

like a year hence? To answer this question, we substitute the new value, Y  119

(along with P240), into the demand function to obtain

[3.5]

Now compare the new and old demand equations. Observe that they are of

the same form, with one key difference: The constant term of the new

demand curve is larger than that of the old. Therefore, if your airline were

to leave its own fare unchanged a year from now, you would enjoy a greater

volume of coach traffic. Figure 3.1 underscores this point by graphing both

the old and new demand curves. Note that the new demand curve consti-

tutes a parallel shift to the right (toward greater sales quantities) of the old

demand curve. At P $240, current demand is 100 seats per flight. At the

same fare, coach demand one year from now is forecast to be 142 seats (due

to the increase in regional income), a gain of 42 seats. In fact, for anyfare

your airline might set (and leave unchanged), demand a year from now is

Q 622 2P.

FIGURE 3.1

A Shift in Demand

Due to growth in

regional income, the

airline’s demand curve

in one year’s time lies

to the right of its cur-

rent demand curve. At

an unchanged price a

year from now, it

expects to sell 42 addi-

tional seats on each

flight.

Price

290

240

100 142 580 622

P = 290 – Q/2

P = 311 – Q/2

Quantity of Units Sold

$311

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