Changes in Demand Law of Demand n Law

Changes in Demand

Law of Demand n Law of Demand - the price of a product (or service) is inversely related to the quantity demanded, ceteris paribus.

Ceteris Paribus Latin for “All other things held constant” n The demand schedule is only taking into account the changes in price. n Not yet considering advertising or the hundreds of other factors that could change demand. n

Change in Demand A change in demand is a shift in the WHOLE demand curve. People are willing to buy more (or less) at every price. n A demand curve is drawn under the assumption of ceteris paribus. n n When this assumption is relaxed, the entire demand curves shifts

Increase in Demand P D D 1 Qd

Decrease in Demand P D 1 D Qd

Change in Demand n Factors Which Cause a Change in Demand n Income

Causes n Income n n n Change in consumer’s income affects their demand for most goods When you graduate from college and start making a substantial income. Would your demand increase or decrease on an item you would like to have? It would increase! You would be willing and able to purchase that item at every price. Thus we say that demand increased.

n Causes Income (Cont’d) Purchasing Distinctions n We usually purchase normal goods – items we demand more of when income increases Examples: new cars, furniture, pizza n Inferior goods – Items we demand less of when income rises Examples: macaroni & cheese, used cars, generic cereals

Change in Demand n Factors Which Cause a Change in Demand Income n Consumer Expectations n

Causes n Consumer Expectations n n Expectations about the future New millennium Sale prices starting or ending soon “Expected future price”

Change in Demand n Factors Which Cause a Change in Demand Income n Consumer Expectations n Population/Number of Buyers n

Causes n Population/Number of Buyers n n Change in size Housing and food consumption Example: Soldiers returning from World War II n The “baby boom”

Change in Demand n Factors Which Cause a Change in Demand Income n Consumer Expectations n Population/Number of Buyers n Consumer Taste and Advertising n

Causes n Consumer Taste and Advertising n n Huge role in demand of product Incredible amounts of money spent to increase demand Example: Super Bowl commercials

Change in Demand n Factors Which Cause a Change in Demand Income n Consumer Expectations n Population/Number of Buyers n Consumer Taste and Advertising n Prices of Related Goods n

Causes n Prices of Related Goods n n Demand curve for one good can be affected by change in another Two types of related goods: • • Compliments – goods bought and used together Example: skis and boots, Peanut Butter & Jelly Substitutes – goods used in place of another Example: snowboard in place of skis