Review Law of Demand Income Effect Substitution Effect

Review • • Law of Demand: Income Effect: Substitution Effect: Diminishing Marginal Utility:

Changes in Demand • Demand Shifts: Time allows factors other than price to influence demand significantly. • In Economics these factors can shift the entire demand curve of a product to the right or to the left.

Changes in Demand Determinants of Demand — Factors that can cause the entire demand curve to shift to either the right or left. 1. 2. 3. 4. 5. Consumer tastes and preferences Income Market size - # of buyers Consumer expectations Price of related goods

Determinants of Demand 1. Consumer Tastes and Preferences: Changes in consumer tastes and preferences can affect demand for a product at all possible prices.

Businesses use advertising to influence demand through consumer tastes and preferences. • • • Bandwagon Testimonial Snob Appeal Wit and Humor Many more

Determinants of Demand • 2. Income—Higher incomes generally allows people to spend more money for goods and services which causes the demand curve to shift to the right. • Normal Goods I D • Inferior Goods I D

Determinants of Demand 3. Market Size—The size of a market tends to affect demand when markets expand contract. An increase in the number of buyers leads to an increase in demand for most products. M D

Determinants of Demand • Government Policy can affect size of markets • China trade policy example • Baby Boomers example

Determinants of Demand • 4. Future Expectations—Your expectations for more future income influences your purchases today. – Ex. Anticipate a raise in your salary OR – If you anticipate being laid off !

Determinants of Demand 5. Price of Related Goods—A change in a products price can affect demand for related goods and services §Complementary Goods—Goods that are commonly used with other goods. P D §Substitute Goods – Goods that are used in place of another good P D

Determinants of Demand Complimentary Goods – Paint / Paintbrushes P D – Price of paint increases – Demand for paintbrushes (complimentary good) decreases – Shifts curve to the left Substitute Goods • Paint / Wallpaper P D • Price of paint increases – demand for wallpaper (substitute good) increases

Two Shifting Curves Rule: When Supply and Demand each shift at the same time, one variable (P or Q) will change, but the other variable will be indeterminant because the magnitude of change is unknown