Download Factors Affecting Demand

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.