WHAT ARE THE FACTORS WHICH CAN CAUSE A CHANGE IN DEMAND?Aim: To understand the factors which influence demand.

THE DEMAND SCHEDULE

Demand schedule: A table that shows the relationship between the price of a good and the quantity demanded.

Example: Helen’s demand for lattes.

Price of

lattes

Quantity of lattes

demanded

$0.00 16

1.00 14

2.00 12

3.00 10

4.00 8

5.00 6

6.00 4 Notice that Helen’s preferences obey the Law of Demand.

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

0 5 10 15

Price of

Lattes

Quantity of

Lattes

HELEN’S DEMAND SCHEDULE & CURVEPrice

of lattes

Quantity of lattes

demanded

$0.00 16

1.00 14

2.00 12

3.00 10

4.00 8

5.00 6

6.00 4

MARKET DEMAND VERSUS INDIVIDUAL DEMAND The quantity demanded in the market is the sum of

the quantities demanded by all buyers at each price. Suppose Helen and Ken are the only two buyers in the

Latte market. (Qd = quantity demanded)

4

6

8

10

12

14

16

Helen’s Qd

2

3

4

5

6

7

8

Ken’s Qd

+

+

+

+

=

=

=

=

6

9

12

15

+ = 18

+ = 21

+ = 24

Market Qd

$0.00

6.00

5.00

4.00

3.00

2.00

1.00

Price

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

0 5 10 15 20 25

P

Q

THE MARKET DEMAND CURVE FOR LATTES

PQd

(Market)

$0.00 24

1.00 21

2.00 18

3.00 15

4.00 12

5.00 9

6.00 6

DEMAND CURVE SHIFTERS

The demand curve shows how price affects quantity demanded, other things being equal.

These “other things” are non-price determinants of demand (i.e., things that determine buyers’ demand for a good, other than the good’s price).

Changes in them shift the D curve…

CONDITIONS WHICH CAN CHANGE THE DEMAND- A SHIFT IN THE CURVE.

A consumers IncomeMay effect different types of goods in different

ways1. Normal2. Inferior Consumer preferences or tastes Prices of related goods- there are two types

of related good1. Compliments2. Substitutes Numbers of buyer in a market

INCOME

In most cases an increase in the a consumers income will result in an increase in demand for a commodity. Even though price has not changed, demand conditions have changed, consumers are able to spend more and purchase more at each price.

1. List all the ways you can think of which could increase consumer income?

INCOME CAN INCREASE BECAUSE……

Increase in wages, salaries Increase in profits, which increase dividends

and returns to shareholders Increase in interest earned on money in the

bank Increase in such things as benefits, pensions,

or an inheritance. Decrease in income tax

DEMAND CURVE SHIFTERS: INCOME

Demand for a normal good is positively related to income. An increase in income causes

increase in the amount demanded at each price, shifting the D curve to the right.

(Demand for an inferior good is negatively related to income. An increase in income shifts D curves for inferior goods to the left.)

Create two pictures to show a definition for the two different types of goods.

COMPLETE ACTIVITIES IN FULL, ADD AS MUCH DETAIL TO ANSWERS AS YOU CAN.

Page 15 for more info1. Suggest three detailed reasons for an increase in

household incomes2. How would a decrease in income affect the demand

for most goods?3. Distinguish between normal and inferior goods,

give examples for each4. Explain how an increase in income tax will affect

the demand for:1. Normal goods2. Inferior goods

5. Suggest what types of firm would do well in a recession where normal income decreases. (use economic theory to back up your ideas)

DEMAND CURVE SHIFTERS: # OF BUYERS An increase in the number of buyers causes

an increase in quantity demanded at each price, which shifts the demand curve to the right.

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D D

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$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

0 5 10 15 20 25 30

P

Q

Suppose the number of buyers increases. Then, at each price, quantity demanded will increase (by 5 in this example).

Demand Curve Shifters: # of buyers

DEMAND CURVE SHIFTERS: PRICES OF RELATED

GOODS Two goods are substitutes if

an increase in the price of one causes an increase in demand for the other.

Example: pizza and hamburgers. An increase in the price of pizza increases demand for hamburgers, shifting hamburger demand curve to the right.

Other examples: Coke and Pepsi, laptops and desktop computers, compact discs and music downloads

DEMAND CURVE SHIFTERS: PRICES OF RELATED

GOODS Two goods are complements if

an increase in the price of one causes a fall in demand for the other.

Example: computers and software. If price of computers rises, people buy fewer computers, and therefore less software. Software demand curve shifts left.

Other examples: college tuition and textbooks, bagels and cream cheese, eggs and bacon

DEMAND CURVE SHIFTERS: TASTES

Anything that causes a shift in tastes toward a good will increase demand for that good and shift its D curve to the right.

Example: The Atkins diet became popular in the ’90s, caused an increase in demand for eggs, shifted the egg demand curve to the right.

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DEMAND CURVE SHIFTERS: EXPECTATIONS Expectations affect consumers’ buying decisions. Examples:

If people expect their incomes to rise, their demand for meals at expensive restaurants may increase now.

If the economy turns bad and people worry about their future job security, demand for new autos may fall now.

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SUMMARY: VARIABLES THAT AFFECT DEMAND

Variable A change in this variable…

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Price …causes a movement along the D curve

No. of buyers …shifts the D curve

Income …shifts the D curve

Price ofrelated goods …shifts the D curve

Tastes …shifts the D curve

Expectations …shifts the D curve

A C T I V E L E A R N I N G 1: Demand curve

A. The price of iPods falls

B. The price of music downloads falls

C. The price of compact discs falls

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Draw a demand curve for music downloads. What happens to it in each of the following scenarios? Why?

A C T I V E L E A R N I N G 1: A. price of iPods falls

21

Q2

Price of music

down-loads

Quantity of music downloads

D1D2

P1

Q1

Music downloads and iPods are complements.

A fall in price of iPods shifts the demand curve for music downloads to the right.

Music downloads and iPods are complements.

A fall in price of iPods shifts the demand curve for music downloads to the right.

A C T I V E L E A R N I N G 1: B. price of music downloads falls

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The D curve does not shift. Move down along curve to a point with lower P, higher Q.

The D curve does not shift. Move down along curve to a point with lower P, higher Q.

Price of music

down-loads

Quantity of music downloads

D1

P1

Q1 Q2

P2

A C T I V E L E A R N I N G 1: C. price of CDs falls

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P1

Q1

CDs and music downloads are substitutes.

A fall in price of CDs shifts demand for music downloads to the left.

CDs and music downloads are substitutes.

A fall in price of CDs shifts demand for music downloads to the left.

Price of music

down-loads

Quantity of music downloads

D1D2

Q2