Transcript What factors affect demand?

What factors affect demand?
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Increase in demand graph
Decrease in demand graph
Price
Income
Number of
Buyers
Prices of other
goods
Determinants of
Demand
Expectations
about future
Supply?
Tastes
Increase in demand graph
Quality
Decrease in demand graph
Determinants of
Demand
Prices of other
goods
Price
Expectations
about future
Quality
Income
Tastes
Number of
Buyers
Supply?
Increase in demand graph
Decrease in demand graph
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Increase in demand graph
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Increase in demand graph
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Decrease in demand graph
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Increase in demand graph
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Price
• Price is the most important determinant of
demand.
• A “demand curve” plots combinations of
prices and quantity demanded.
• A shift in price causes a shift along the
demand curve
Increase in demand graph
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Price (continued)
• A change in price causes a shift along the
demand curve.
• A shift along the demand curve is referred
to as a “shift in the quantity demanded.”
• A shift in any other variable except price
causes a shift in the entire demand curve.
• A shift in the entire demand curve is
referred to as a “shift in demand.”
Increase in demand graph
Decrease in demand graph
Income
• Changes in income can increase or decrease
demand.
• A good whose demand decreases with an
increase in income is called an “inferior
good.”
• A good whose demand increases with an
increase in income is called a “normal
good.”
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Decrease in demand graph
Examples of changes in income
• An increase in income will reduce the
demand for ramen noodles or generic
products.
• An increase in income will increase the
demand for cars or clothing.
• An increase in income will significantly
increase the demand for air travel or
jewelry.
Increase in demand graph
Decrease in demand graph
Prices of other goods
• Changes in the prices of other goods can
increase or decrease demand.
• A good that causes an increase in the
demand for another good when its price
increases is called a “substitute good.”
• A good that causes a decrease in the
demand for another good when its price
increases is called a “complementary good.”
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Decrease in demand graph
Examples of changes in other
prices
• An increase in the price of peanut butter
will reduce the demand for jelly. Peanut
butter and jelly are complements.
• An increase in the price of Pepsi will
increase the demand for Coke. Pepsi and
Coke are substitutes.
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Number of buyers
• An increase in the number of potential
buyers will increase the demand for the
good.
• For example, the demand for land increases
as the population increases.
• Similarly baseball tickets are generally
more expensive in larger cities.
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Future Prices
• An increase in the expected future price of a
good increases current demand.
• A decrease in the expected future price of a
good decreases current demand.
• For example, when a good is temporarily
put on sale, people stock up on the good.
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Tastes
• Demand curves can shift due to changes in
tastes over time.
• For example, demand for cereal may be
high in the morning but low at night.
• Similarly, demand for Saturday Night Fever
CDs may be high in the 1970s but low in
the 2000s.
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Quality
• Demand curves can shift due to changes
quality.
• At a given price, demand for Giordano’s
pizza is higher than the demand for Papa
John’s.
• Similarly, CDs cost more than cassettes
because the music is of higher quality.
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Supply?
• Demand curves do not shift due to changes
supply.
• Shifts in supply change the equilibrium
price causing a shift along the demand
curve.
• Shifts in supply cause a change in the
quantity demand not a shift in the demand
curve.
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Price
Graph of a supply shift
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Quantity
Old demand
New supply
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Supply
• An decrease in
supply shifts the
supply curve to
the left.
• Equilibrium
price increases.
• Quantity
demanded
decreases.
Decrease in demand graph
Price
Increase in demand
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Quantity
Old demand
New demand
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• An increase in
demand shifts the
demand curve to
the right.
• Equilibrium price
increases.
• Quantity demanded
increases.
Supply
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Price
Decrease in demand
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Quantity
Old demand
New demand
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• A decrease in
demand shifts
the demand
curve to the left.
• Equilibrium
price falls.
• Quantity
demanded falls.
Supply
Decrease in demand graph