by Extension and Contraction of Demand are two concepts that explain how the demand for a product responds to changes in its price. Both are movements along the same demand curve, influenced by price changes while other factors remain constant.
1. Extension of Demand
An extension of demand occurs when there is an increase in the quantity demanded due to a decrease in the price of a good or service. When the price of a good falls, consumers are willing to buy more of it, leading to an increase in demand. This is represented by a downward movement along the demand curve. In other words, the demand curve does not shift; instead, there is a movement downwards along the curve, indicating more units are being demanded at the new lower price.
- Example:
Consider the price of smartphones. If the price of a smartphone decreases from $1000 to $800, more consumers may decide to purchase the phone at the lower price. As a result, the quantity demanded increases, leading to an extension of demand. The lower price triggers higher demand, and the movement is along the existing demand curve to the right.
Factors Leading to Extension of Demand:
- Price Reduction: The most direct factor causing an extension of demand is a decrease in the price of a good. For example, when the price of a product like gasoline falls, more people are likely to purchase it.
- Consumer Expectations: If consumers expect prices to continue falling, they may increase their demand at the current lower price, leading to an extension.
- Competitiveness: A lower price can make a good more competitive compared to other similar goods. Consumers may switch from purchasing an expensive product to a cheaper alternative, causing an extension in demand.
2. Contraction of Demand
Contraction of demand occurs when there is a decrease in the quantity demanded due to an increase in the price of a good or service. When the price of a product rises, consumers are less willing or able to purchase it, leading to a reduction in demand. This is represented by an upward movement along the demand curve, indicating a decrease in the quantity demanded at the new higher price.
- Example:
Suppose the price of movie tickets increases from $10 to $15. As the price rises, some consumers may decide to attend movies less frequently, leading to a decrease in the quantity demanded. The movement here is along the demand curve upwards, reflecting a contraction in demand. The higher price leads to lower demand, and the movement occurs to the left along the curve.
Factors Leading to Contraction of Demand:
- Price Increase: The primary factor causing contraction in demand is an increase in the price of a good. For example, if the price of a product like bread rises significantly, consumers may reduce their consumption or switch to cheaper alternatives.
- Income Effect: When prices rise, consumers’ real income is effectively reduced, meaning they are less able to afford the same quantity of goods. As a result, they may cut back on purchasing the product, leading to a contraction of demand.
- Availability of Substitutes: If the price of a good rises, consumers may switch to a cheaper substitute, resulting in a contraction of demand for the original good.
Key Differences between Extension and Contraction of Demand
- Price Movement:
Extension of demand is caused by a fall in price, leading to an increase in quantity demanded. On the other hand, contraction of demand is caused by a rise in price, resulting in a decrease in quantity demanded.
- Direction of Movement:
Extension results in a rightward movement along the demand curve, indicating an increase in demand. Contraction leads to a leftward movement along the demand curve, reflecting a decrease in demand.
- Effect on Market:
In the case of extension, more goods are demanded at a lower price, while in contraction, fewer goods are demanded due to a higher price.
Examples of Extension and Contraction in Real Life
- Extension:
A supermarket offers a discount on its fresh vegetables. The price of tomatoes drops from $3 to $2 per kilogram. As a result, more customers decide to buy tomatoes, and the quantity demanded increases. This is an extension of demand due to the price reduction.
- Contraction:
Airline tickets for a particular flight rise from $200 to $300 due to increased fuel costs. As a result, fewer people are willing to buy the tickets, leading to a contraction in demand as fewer tickets are sold at the higher price.
illustrating Extension and Contraction of Demand with Graphs
In both cases, extension and contraction of demand can be depicted as movements along a downward-sloping demand curve. The demand curve typically slopes from the top left to the bottom right, reflecting the inverse relationship between price and quantity demanded.
- Extension: When the price of a product falls, the quantity demanded increases, and this is shown as a downward movement along the demand curve.
- Contraction: When the price increases, the quantity demanded decreases, and this is shown as an upward movement along the demand curve.
