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Factors Affecting Demand Change in Quantity Demanded Income Effect Substitution Effect Change in Demand Substitutes Complements Change in Quantity Demanded • Change in quantity demanded – A movement along the demand curve that shows a change in the quantity of the product purchased in response to a change in price Change in Quantity Demanded • The Income Effect – The change in quantity demanded because of a change in price that alters consumers’ real income • The Substitution Effect – The change in quantity demanded because of the change in the relative price of the product. Change in Demand • When something happens that causes the Demand Curve to shift. – People are willing to buy different amounts of the product at the same prices – Shift to the right – shows an increase in demand – Shift to the left – shows a decrease in demand • Change in demand results in entirely new curve Change in Demand • When a Change in Demand occurs, a new schedule and curve must be constructed to reflect the new demand at all possible prices Determinants of Demand • Things that cause a new curve (shift to right or left) – Income – Tastes – The price of related goods – Expectations – Number of consumers Determinants of Demand • Consumer Income – When your income goes up, you can afford to buy more goods and services – As incomes rise, consumers are able to buy more products at each and every price • Result: Shift to the right – Decrease in income - Loss of income would cause people to buy less of a good at each and every price • Demand curve then shifts to the left, showing decrease in demand. Determinants of Demand • Consumer Tastes – Consumers don’t always want the same things • Advertising, news reports, fashion trends, introduction of new products • Advertising helps promote products – When popularity of products increases, people buy more of it • When consumers want more of an item, they tend to buy more of it at each and every price. • Result: The demand curve shifts to the right – If people get tired of a product, they buy less at each and every price – causing shift to the left Determinants of Demand • Consumer Tastes (cont.) • Development of new products can have an effect on consumer tastes – Advances in technology – Sometimes tastes and preferences change by themselves • Concerns about health greatly increases demand for healthier, less-fattening foods • Demand for smaller, more fuel-efficient cars ahs grown – Causing a change in consumer tastes Determinants of Demand • Substitutes – A change in the price of related products can cause a change in demand • Some products are known as substitutes because they can be used in place of other products • The demand for a product tends to decrease if the price of its substitute goes down. • The demand for a product tends to increase if the price of its substitute goes up. Determinants of Demand • Compliments – Other related goods are known as complements • The use of one increases the use of the other – Computers and Software – Gillette corporation makes razor handles and razor blades • To generate a high demand for their products, the price of the razor handles is kept low • The razor blades are sold at very profitable prices • Result, the company is able to use the profits on the blades to offset the losses on the handles • It is unlikely demand for Gillette blades would have been as high if the handles had been more expensive. Determinants of Demand • Number of Consumers – An increase in the number of consumers can cause the market demand curve to shift • When a large number of people leave the market for good, the result is a decline in market demand Normal & Inferior Goods • Normal good – A good is normal if it’s consumption increases when the income increases. – Example: When your income increases, you buy more clothes. • Inferior good – Consumption decreases when the available income increases. – Example: Used books and noodles – the more income you have the less used books and noodles you buy. Elasticity of Demand • Unit Elastic – A given change in price causes a proportional change in quantity demanded – The percent change in quantity roughly equals the percent change in price (5% drop in price causes a 5% increase in quantity demanded). Elasticity of Demand • Elastic Demand – When a given change in price causes a relatively larger change in quantity demanded • Inelastic Demand – A given change in price causes a relatively smaller change in the quantity demanded. Determinants of Demand Elasticity • Can the purchase be delayed? – A consumer’s need for a product is sometimes urgent and cannot be put off – When this happens, demand tends to be inelastic – product demanded is not especially sensitive to changes in price – Example: Diabetic needing insulin • If purchase of product is not necessary, purchase can be delayed and is then considered to be elastic Determinants of Demand Elasticity • Are adequate Substitutes Available? – If adequate substitutes are available, consumers can switch back and forth between a produce and its substitute to take advantage of the best price. – If price of beef & butter go up, buyers can switch to chicken and margarine – With enough substitutes available, the more inelastic the demand.