Factors Affecting Demand

How do businesses decide what to produce? What stops you from buying a product? What makes you want to buy a product? The product is too expensive, out of fashion, or of poor quality. The product is affordable, popular, or necessary for survival. How do businesses decide what to produce? Businesses find out what consumers need/want by doing market research and finding out what is popular/what consumers use.

A Change in the Quantity Demanded What is the effect of a change in price on quantity demanded? Main Ideas The only event that can cause a change in quantity demanded is a change in price. A change in the quantity demanded due to a change in price is represented on a demand curve as movement along the curve. The income effect is a change in quantity demanded because of a change in price that makes consumers feel richer or poorer. A shift in relative prices may cause a substitution effect, in which consumers substitute an alternative less expensive product for one that has become more expensive.

How is a change in the quantity demanded illustrated on the demand curve? A change in quantity demanded causes movement along the demand curve. Quantity demanded increases when the price decreases.

The Income Effect The change in quantity demanded because of a change in price that alters consumers’ income. Consider how your purchasing decisions might be affected if you require two fill-ups per month for your vehicle, and the price of gasoline rises. If the price of gasoline rises, but your income does not, you obviously cannot continue buying the same amount of gas AND everything else they normally purchase Income Effect can work the opposite way as well. If you are already buying two fill-ups a month and the price of gasoline drops in half, your real income then increases. you will have more purchasing power and will probably increase your spending on other goods.

Substitution Effect The portion of change in quantity demanded that is due to a change in a relative price of the good. List five goods you use. Now list other goods you would buy more of if the prices of the original goods rose and the substitution effect took hold. “When the price of a burrito drops from $5 to $3, burritos become less expensive than before, in comparison with other goods and services. As a result, consumers tend to replace a more costly item – say, pizza- with a less costly one- more burritos.”

Change in Demand Movement OF A demand curve due to people wanting different quantities at all prices. Determinants Consumer Income Consumer Tastes Price of Substitutes Price of Complements Change in Expectations Number of Consumers

Change in Demand What factors, excluding price, affect demand? Main Ideas When a change in demand occurs, the entire demand curve shifts to the left or right. A change in total consumer income affects how much of a product consumers buy at all possible prices. The demand curve for a product shifts when consumer tastes change. An increase in the price of a product causes an increase in demand for substitute products and a decrease in demand for the product’s complements. Consumer expectations cause people to demand either more or less of a good. A change in the total number of consumers causes the entire demand curve to shift right or left.

Consumer Income Income up-- people can afford more goods so demand goes up (Shift Right) Income down-- people can’t afford as much so demand goes down (Shift Left)

Consumer Tastes New product or fad demand will go up (Shift Right) Fad wears out or people tire of a product demand will go down (Shift Left)

Price of Substitutes Price of substitute down demand for original product decreases (Shift Left) Price of substitute up demand for original product increases (Shift Right)

Price of Complements Price of complement down demand for other complement up (Shift Right) Price of complement up demand for other complement down (Shift Left) I’m not talking about the demand of verbal complements. Although, compliments are always welcome!

Change in Expectations New innovations or products coming into an industry may decrease demand (Shift Left) May increase demand in certain cases of weather (Shift Right)

Number of Consumers More people enter in demand goes up (Shift Right) People leave demand goes down (Shift Left) What eventually would happen to the demand curve for toys if the birthrate declined? Why? The demand curve would shift to the left, because there would be a decline in demand for toys at each and every price

A disease destroys much of the coffee crop in South America How might this affect the price of coffee? The price increases How might this affect the demand for substitute products? Demand for substitute drinks, such as tea or soft drinks, should increase. How might this affect the demand for complementary products? Demand for complementary products, such as sugar or coffee creamer, should decrease.

DO YOU KNOW? What causes a change in QD??? What causes a change in Demand??? Which way Demand Curves shift??? How the Factors of Demand work???