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Lesson Objectives:
By the end of this lesson you will be able to:
*Explain the difference between a change in quantity demanded
and a shift in the demand curve.
*Identify the factors that create changes in demand and that
can cause a shift in the demand curve
*Understand why a change in demand for one good can affect
demand for a related good.
Changes in Demand
Sometimes increases or decreases in demand are not connected to price.
Example: You and your friends were planning on going to Sonic for dinner. An hour before you
go, a storm rolls in and it starts raining. All of the sudden your demand for Sonic drops and your
demand for home-delivered pizza rises. This change in demand had nothing to do with the price
of a burger at Sonic or the price of a delivery pizza from pizza Hut.
When we counted the number of pizza slices that would sell as the price went up or down, we
assumed that nothing besides the price of pizza would change. Economists refer to this
assumption as ceteris paribus Which is Latin for “all other things held constant”. The demand
schedule took into account only changes in price. It did not consider the effects of news reports
or any one of the thousands of other factors that change daily.
A demand curve is accurate only as long as there are no changes other than price that could
affect the consumer’s decision. In other words, a demand curve is accurate only as long as the
ceteris paribus assumption is true. When the price changes, we move along the curve to a
different quantity demanded.
When we drop the ceteris paribus rule and allow other factors to change, we no longer move
along the demand curve. Instead, the entire demand cure shits. A shift in the demand curve
means that at every price, consumers buy a different quantity than before. This shift of the
entire curve is what economists refer to as a change in demand.
Change in demand curve video
What causes a Shift?
A change in the price of a good does not cause the demand curve to shift. The effects of
changes in price are already built into the demand curve.
However, several other factors can cause demand for a good to change. These changes can lead
to a change in demand rather than simply a change in the quantity demanded:
1.
2.
3.
4.
5.
Income
Consumer Expectations
Population
Demographics
Consumer Tastes and Advertising
1. Income- Most items that we purchase are normal goods (goods that consumers demand
more of when their incomes increase).
*A rise in income would cause a new line to the right of the original curve. This shift to the right
of the curve is called an increase in demand.
*A fall in income would cause a new line to the left of the original curve. This shift to the left of
the curve is called a decrease in demand.
There are also other goods called inferior goods. They are called inferior goods because an
increase in income causes demand for these goods to fall. Inferior goods are goods that you
would not necessarily buy if you r income were to rise and you could afford something better
(used car).
2. Consumer Expectations- Our expectations about the future can affect our demand for
certain goods.
Example: You have had your eye on a new car for several weeks. You go to a dealership and the
salesperson mentions that the store will be raising the price of that car at the end of the week.
Now that you are expecting a higher price for the car at the end of the week, you are more likely
to buy the car today.
Or
The salesperson tells you that the car will go on sale next week. Your immediate demand falls to
zero because you know the car will be cheaper if you wait until next week.
3. Population- Changes in the size of the population will also affect the demand for most
products. A rise in population will increase the demand for houses and food.
Example: Baby boomers
*Led to increasing demand for housing in 1950s
*Led to increasing demand for elementary/high schools in 1960s
*Led to increasing demand for colleges in 1970s
*Will lead to increasing demand for senior citizen services in the near future.
4. Demographics- Are the statistical characteristics of populations, such as age, race, gender,
occupation, and income level. Businesses use this data to identify who potential customers are,
where they live, and how likely they are to purchase a specific product.
Example: The population surge of Latin Americans in the United States has caused businesses
to devote more of their resources to producing good and services demanded by Hispanic
customers.
5. Consumer Tastes and Advertising- Fads, social trends, the influence of TV shows, and
effective advertising.
Example:
Jeans:
Bell Bottoms
Stone Wash
Button Fly
Baggy
Skinny
Prices of Related Goods
The demand curve for one good can also shift in response to a change in the demand for another
good. There are two types of related goods that interact this way: complements and substitutes.
*Compliments- Are two goods that are bought and used together (skies and ski boots).
*Substitutes- Are goods that are used in place of one another. (skies and snowboard).