Transcript Change in Demand • Factors Which Cause a Change in Demand – Number of Buyers – Tastes and Preferences – Income – Price of Other Goods –

Change in Demand
• Factors Which Cause a Change in
Demand
– Number of Buyers
– Tastes and Preferences
– Income
– Price of Other Goods
– The Availability of Credit
– Expectations about Future Prices
Change in Demand - Number
of Buyers
The more buyers in the market for a good, the
greater the total quantity demanded of the
good at a given price. Since the quantity
demanded is higher at every given price, the
demand has increased.
Likewise, if there are less buyers in the market
there is less quantity demanded at every
price, so demand has decreased.
Change in Demand - Tastes
and Preferences
• Let’s say we find out that wearing
sunglasses can improve your vision?
If consumers prefer a good more, the
demand for the good increases (a
rightward shift of the demand curve).
• What if we find out wearing
sunglasses causes cataracts? If
consumers prefer a good less, the
demand for the good decreases (a
leftward shift of the demand curve).
Change in Demand - Income
• Let’s say that you graduate and start
making a substantial income. What
might we expect to happen to the
amount of sunglasses you would
want to buy?
Change in Demand - Income
• Let’s say that after a year at your new
job the boss cuts salaries by 30%.
What happens to Demand?
Normal and Inferior Goods
• Given the info. we have, we can say
that sunglasses are a “normal good”
• Normal Good - any good which increases
in demand as income increases (and viceversa)
• Now let’s consider Mac & Cheese. What
happens to your demand for Mac and
Cheese when you get a job?
Normal and Inferior Goods
• If your boss cuts your income, though
you might start eating more Mac and
Cheese. This means that Mac and
Cheese is an “inferior good”
• Inferior Good - any good which decreases
in demand as income increases (and viceversa)
Change in Demand - Price of
Other Goods
• Stouffer’s meals are a lot like
Hungry-Man meals, but have a better
quality. They are presently more
expensive than Hungry-Man meals.
• What would happen to the Demand
for Hungry-Man if the price of
Stouffer’s fell?
Change in Demand - Price of
Other Goods
• What would happen to the Demand for
Hungry-Man if the price of Stouffer’s
rose?
• This relationship between Hungry-Man
and Stouffer’s implies they are
“substitutes.”
• Substitute - a good which can be
consumed in place of another good
Change in Demand - Price of
Other Goods
• Thus an increase in the price of a
substitute will increase the demand
for the good
• And a decrease in the price of a
substitute will decrease the demand
for the good
Change in Demand - Price of
Other Goods
• What if the price of microwaves goes
up? What ought to happen to the
demand for Hungry-Man meals?
Change in Demand - Price of
Other Goods
• What if the price of microwaves goes
down?
• This relationship between Hungry-Man
meals and microwaves implies they are
“complements.”
• Complement - a good which is consumed
along with the consumption of another
good
Change in Demand - Price of
Other Goods
• Example - Peanut Butter and Jelly are
complements.
• If price of peanut butter increases,
consumers purchase less peanut butter
• Law of demand tells us this
• Result - Consumers purchase less jelly
• Since buy less peanut butter need less jelly for
PB&J sandwiches
Change in Demand - Price of
Other Goods
• Thus, either of the following will
increase Demand
• Price of a substitute good increases
• Price of a complement good decreases
• And either of the following will
decrease Demand
• Price of a substitute good decreases
• Price of a complement good increases
Change in Demand Availability of Credit
• If it is easier to borrow money (credit
cards have lower interest rates or are
easier to obtain, etc.), do you think
people will buy more or less of a good
at a given price?
Change in Demand Availability of Credit
• If it is harder to borrow money, what
do you think will happen to the
demand for a good?
Change in Demand Expectations about Future
Prices
• If we were to hear a new story about
how CD prices were going to go up
next month, would you buy that CD you
have had your eye on now or later?
Change in Demand Expectations about Future
Prices
• Likewise, if we hear that CD prices are
going to drop next month, what do we
do now?
Marginal Utility
• Marginal Utility- the additional
usefulness or satisfaction a person
gets from acquiring one more unit of a
product.
• For example, let’s say you’ve just
finished playing a game of basketball
and you’re very thirsty.
Marginal Utility
• How many of you would want a bottle
of PowerAde?
• The amount of PowerAde that you drink
is the marginal utility of that bottle of
PowerAde.
Marginal Utility
• If after you drink that first bottle of
PowerAde, you’re still thirsty, you may
choose to have another. The extra
satisfaction you receive from the second
bottle is the marginal utility of that bottle of
PowerAde.
• Eventually, the marginal utility will be less
than the price of the PowerAde and you’ll
stop buying. This is known as diminishing
marginal utility.
Marginal Utility
• Diminishing Marginal Utility- the more
units of a certain product a person
acquires, the less eager that person is
to buy more of the product.
Elasticity of Demand
• At its current price, how many of you
would buy a Nintendo Wii?
• Now, let’s say that we lower the price of
the Wii to about $100, now how many of
you would buy one?
Elasticity of Demand
• The demand for the Wii is regarded as
elastic.
– Elastic- a small change in price causes a
large change in quantity demanded
Elasticity of Demand
• Now let’s look at salt. A higher or lower
price of salt probably won’t bring much
change in the amount bought, because
people can only consume so much salt.
• The demand of salt is regarded as
inelastic.
– Inelastic- a change in price causes a small
change in quantity demanded
Elasticity of Demand
• Remember the candy bar example from
last class? Let’s say we’re in charge of
setting the price for it. And at $0.25, it
has a demand of 10.
– That gives us a total revenue of $2.50
Elasticity of Demand
• So, we want to make more $$$, so we
decide to raise the price to $0.50, in
order to increase our revenue. Well, at
$0.50 the demand for our candy bar is
only 5.
– So, unfortunately our revenue was
unchanged at $2.50; this means that our
candy bar is unit elastic.
– Unit Elastic- total revenues remain the
same when the price changes
Elasticity of Demand
Type of
Elasticity
Change in
Price
Change in
Total Revenue
Elastic
Decrease
Increase
Inelastic
Decrease
Decrease
Unit Elastic
Decrease
No Change