What is called as the Contraction of Demand?

Contraction of demand is just opposite of its expansion while a decrease in demand is just opposite of an increase in it. Other things remaining unchanged, less of a product is demanded at a higher price. Fall in demand caused by a rise in price of the product is called ‘contraction of demand.’ Figure 2.10 demonstrates it.

On the other hand, ‘decrease in demand’ refers to a fall in the quantity of the product demanded due to a negative or unfavorable change in one of the shift-factors, namely, income of the consumers or prices of related goods, or tastes, preferences and fashions while product price remains as before.

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When quantity demanded of a good in common consumption decreases in response to a decrease in purchases made by some individuals out of pride, the phenomenon is called the ‘Snob Effect’ and is often referred to as an example of negative network externality leading to an inward shift in demand.

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In other words, less of a product is demanded at the same price due to a fall in consumers’ income, or due to a fall in the prices of the substitutes, or due to a rise in the prices of the complements, or even due to an unfavorable change in consumers’ tastes, preferences or fashions, or due to Snob Effect. Figure 2.11 demonstrates decrease in demand.

In Figure 2.10, demand contracts by Q1Q2 in response to a rise in the product-price while in Figure 2.11, demand decreases by Q1Q2 at the same price due to a decrease in consumer’s income.


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