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Review • • • • Law of Demand: Income Effect: Substitution Effect: Diminishing Marginal Utility: Changes in Demand • Demand Shifts: Time allows factors other than price to influence demand significantly. • In Economics these factors can shift the entire demand curve of a product to the right or to the left. Changes in Demand Determinants of Demand — Factors that can cause the entire demand curve to shift to either the right or left. 1. 2. 3. 4. 5. Consumer tastes and preferences Income Market size - # of buyers Future expectations Price of related goods Determinants of Demand 1. Consumer Tastes and Preferences: Changes in consumer tastes and preferences can affect demand for a product at all possible prices. Businesses use advertising to influence demand through consumer tastes and preferences. • • • • • Bandwagon Testimonial Snob Appeal Wit and Humor Many more Determinants of Demand • 2. Income—Higher incomes generally allows people to spend more money for goods and services which causes the demand curve to shift to the right. • Normal Goods I D • Inferior Goods I D Determinants of Demand 3. Market Size—The size of a market tends to affect demand when markets expand and contract. An increase in the number of buyers leads to an increase in demand for most products. M D Determinants of Demand • Government Policy can affect size of markets • China trade policy example • Baby Boomers example Determinants of Demand • 4. Future Expectations—Your expectations for more future income influences your purchases today. –Ex. Anticipate a raise in your salary OR –If you anticipate being laid off ! Determinants of Demand 5. Price of Related Goods—A change in a products price can affect demand for related goods and services Complementary Goods—Goods that are commonly used with other goods. P D Substitute Goods – Goods that are used in place of another good P D Determinants of Demand Complimentary Goods – Paint / Paintbrushes P D – Price of paint increases – Demand for paintbrushes (complimentary good) decreases – Shifts curve to the left Substitute Goods • Paint / Wallpaper P D •Price of paint increases – demand for wallpaper (substitute good) increases