Transcript Change in Quantity Demanded - Danville

Key Terms
– change in quantity demanded
– income effect
– substitution effect
– change in demand
– substitutes
– complements
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Change in Quantity Demanded
• A change in quantity
demanded is movement along
the demand curve that shows a
change in the quantity of the
product purchased in response
to a change in price.
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The Income Effect
• Income effect = the change in quantity
demanded because of a change in
price that alters consumers’ real income.
• When prices drop, consumers pay less
for the product and, as a result, have
some extra real income to spend.
• The increase in spending is due to
consumers feeling richer.
• If the price goes up, the opposite would
happen and consumers would feel
poorer.
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The Substitution Effect
• Substitution effect = the change in
quantity demanded because of the change
in the relative price of the product.
• A lower price also means that the product
would be relatively less expensive than
other similar goods and services.
• As a result, consumers will have a
tendency to replace a more costly item
with a less costly one.
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The Substitution Effect (cont.)
• Note that whenever a change in price
causes a change in quantity demanded,
the change appears graphically as a
movement along the demand curve. 
• The change in quantity demanded can be
either an increase or a decrease–but in
either case the demand curve itself does
not shift.
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Change in Demand
• Change in demand = People are now
willing to buy different amounts of the
product at the same prices.
• As a result, the entire demand curve shifts
• Right to show an increase in demand.
• Left to show a decrease in demand for the
product.
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Change in Demand (cont.)
• Therefore, a change in demand results in
an entirely new curve.
• When the demand curve changes, a new
schedule or curve must be constructed to
reflect the new demand at all possible
prices.
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Consumer Income
• Change in consumer income can cause
a change in demand.
• 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.
• When this happens, the demand curve
shifts to the right.
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Consumer Income (cont.)
• Exactly the opposite could happen if
there was a decrease in income.
• The demand curve then shifts to the left,
showing a decrease in demand.
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Consumer Tastes
• Consumers do not always want the same
things.
• Advertising, news reports, fashion trends,
the introduction of new products, and
even changes in the season can affect
consumer tastes.
• If consumers want more of an item, they
would buy more of it at each and every
price.
• As a result, the demand curve shifts to the
right.
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• If people get tired of a product, they will
buy less at each and every price, causing
the demand curve to shift to the left.
• The development of new products can
also have an effect on consumer tastes.
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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.
• In general, the demand for a product
tends to increase if the price of its
substitute goes up.
• The demand for a product tends to
decrease if the price of its substitute goes
down.
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Complements
• Other related goods are known as
complements, because the use of one
increases the use of the other.
• Personal computers and software are two
complementary goods.
• When the price of computers decreases,
consumers buy more computers and
more software.
• If the price of computers rises, consumers
would buy fewer computers and less
software.
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Change in Expectations
• “Expectations” refers to the way people
think about the future.
• For example, suppose that a leading
maker of audio products announces a
technological breakthrough that would
allow more music to be recorded on a
smaller disk at a lower cost than before.
• Even if the new product might not be
available for another year, some
consumers might decide to buy fewer
music CDs today simply because they
want to wait for a better product.
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Change in Expectations (cont.)
• Purchasing less at each and every price
would cause demand to decline, which is
illustrated by a shift of the demand curve to
the left.
• If future shortages of a product are
predicted, this might cause demand to
increase, which is demonstrated by a shift
of the demand curve to the right.
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Number of Consumers
• A change in income, tastes, and prices of
related products affects individual
demand schedules and curves.
• This in turn affects the market demand
curve, which is the sum of all individual
demand curves.
• An increase or decrease in the number of
consumers can cause the market demand
curve to shift.
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