Shift Of The Demand Curve

of Bottles

FIGURE 2

A change in any influence on demand besides the price of the good causes the entire demand curve to shift. An increase in income, for example, causes the demand for maple syrup, a normal good, to shift from D, to D2. At each price, more bottles are demanded after the shift.

the total value of everything you own (cash, bank accounts, stocks, bonds, real estate, valuable artwork, or any other valuable property) minus everything you owe (home mortgage, credit card debt, auto loan, student loans, and so on).

You've already seen (in Table 2 and Figure 2) how an increase in income would increase the demand for maple syrup. And while income and wealth are different things, they have similar effects on demand. If someone's wealth increases—say, through inheritance or an increase in the value of their stocks or bonds—they tend to respond just as if their income had increased, even if their income remains unchanged.

A rise in either income or wealth increases the demand for most goods. We call these normal goods. Housing, airline travel, health club memberships and maple syrup are all examples of normal goods.

Income The amount that a person or firm earns over a particular period.

Wealth The total value of everything a person or firm owns, at a point in time, minus the total value of everything owed.

Normal good A good that people demand more of as their income

The demand for most goods (normal goods) is positively related to income or wealth. A rise in either income or wealth will increase demand for these goods, and shift the demand curve to the right.

But not all goods' demand curves behave this way. For some goods—called inferior goods—a rise in income or wealth will decrease demand. Ground chuck is one example. It's a cheap source of protein, but not most people's idea of a fine dining experience. Higher income or wealth would enable consumers of ground chuck to afford more steaks, decreasing their demand for ground chuck. For similar reasons, Greyhound bus tickets, low-rent housing units, and single-ply paper towels are probably inferior goods. For all of these goods, an increase in consumers' income or wealth would decrease demand, shifting the demand curve to the left.

Inferior good A good that people demand less of as their income

Prices of Related Goods. A substitute is a good that can be used in place of another good and that fulfills more or less the same purpose. For example, many people use maple syrup to sweeten their pancakes, but they could use a number of other

Substitute A good that can be used in place of some other good and that fulfills more or less the same purpose.

things instead: honey, sugar, fruit, or jam. Each of these can be considered a substitute for maple syrup.

When the price of a substitute rises, people will choose to buy more of the good itself. For example, when the price of jam rises, some jam users will switch to maple syrup, and the demand for maple syrup will increase. In general, when the price of a substitute rises, the demand for a good will increase, shifting the demand curve to the right.

Of course, if the price of a substitute falls, we have the opposite result: Demand for the original good decreases, shifting its demand curve to the left.

There are countless examples in which a change in a substitute's price affects demand for a good. A rise in the price of postage stamps would increase the demand for electronic mail. A drop in the rental price of videos would decrease the demand for movies at theaters. In each of these cases, we assume that the price of the substitute is the only price that is changing. Complement A good that is used A complement is the opposite of a substitute: It's used together with the good together mth some °ther g°°d we are interested in. Pancake mix is a complement to maple syrup, since these two goods are used frequently in combination. If the price of pancake mix rises, some consumers will switch to other breakfasts—bacon and eggs, for example—that don't include maple syrup. The demand for maple syrup will decrease.

A rise in the price of a complement decreases the demand for a good, shifting the demand curve to the left.

This is why we expect a higher price for automobiles to decrease the demand for gasoline and a lower price for movie tickets to increase the demand for movie theater popcorn.

Population. As the population increases in an area, the number of buyers will ordinarily increase as well, and the demand for a good will increase. The growth of the U.S. population over the last 50 years has been an important reason (but not the only reason) for rightward shifts in the demand curves for food, rental apartments, telephones, and many other goods and services.

Expectations. Expectations of future events—especially future changes in a good's price—can affect demand. For example, if buyers expect the price of maple syrup to rise next month, they may choose to purchase more now to stock up before the price hike. The demand curve would shift to the right. If people expect the price to drop, they may postpone buying, hoping to take advantage of the lower price later. This would shift the demand curve leftward.

Expectations are particularly important in the markets for financial assets such as stocks and bonds and in the market for real estate. People want to buy more stocks, bonds, and real estate when they think their prices will rise in the near future. This shifts the demand curves for these items to the right.

Tastes. Suppose we know the number of buyers in Wichita, their expectations about the future price of maple syrup, the prices of all related goods, and the average levels of income and wealth. Do we have all the information we need to draw the demand curve for maple syrup in Wichita? Not really. Because we do not yet know how consumers there feel about maple syrup. How many of them eat break-

fast? Of these, how many eat pancakes or waffles? How often? How many of them like maple syrup, and how much do they like it? And what about all of the other goods and services competing for Wichita consumers' dollars: How do buyers feel about them?

The questions could go on and on, pinpointing various characteristics about buyers that influence their attitudes toward maple syrup. The approach of economics is to lump all of these characteristics of buyers together and call them, simply, tastes. Economists do not try to explain where these tastes come from or what makes them change. These tasks are left to other social scientists—psychologists, sociologists, and anthropologists. Instead, economists concern themselves with the consequences of a change in tastes, whatever the reason for its occurrence.

When tastes change toward a good (people favor it more), demand increases, and the demand curve shifts to the right. When tastes change away from a good, demand decreases, and the demand curve shifts to the left. An example of this is the change in tastes away from cigarettes over the past several decades. The cause may have been an aging population, a greater concerns about health among people of all ages, or successful antismoking advertising. But regardless of the cause, the effect has been to decrease the demand for cigarettes, shifting the demand curve to the left.

Figure 3 summarizes the important variables that affect the demand side of the market, and how their effects are represented with a demand curve. Notice the important distinction between movements along the demand curve and shifts of the entire curve.

A troubling thought may have occurred to you. Among the variables that shift the demand curve in Figure 3, shouldn't we include the amount supplied by sellers? Or to put the question another way, doesn't supply influence demand?

The answer is no—at least, not directly. The demand curve tells us how much buyers would choose to buy at different prices. It provides answers to a series of hypothetical questions: How much maple syrup would consumers choose to buy if the price were $3.00 per bottle? If the price were $3.50 per bottle? and so on. Sellers' decisions have no effect on the demand curve, since they do not affect the answers to these hypothetical questions.

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Responses

  • tullio
    How much do the demand for pancake mix change when the price rises?
    9 days ago

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