Essential Question: What factors affect demand? Changes in Demand Essential Question: What factors affect demand?

S E C T I O N 2 Shifts of the Demand Curve What is the difference between a change in quantity demanded and a shift in the demand curve? What factors can cause shifts in the demand curve? How does the change in the price of one good affect the demand for a related good?

What factors affect demand? Number of Buyers Price Prices of other goods Determinants of Demand Income Quality Expectations about future Tastes/ Advertising Essential Question: What factors affect demand?

Movement along the Curve Movement vs. Shift A change in price, causes a movement along the demand curve, changes the quantity demanded A change in one of the determinants of demand other than price causes a shift of a demand curve Essential Question: What factors affect demand?

What factors affect demand? Price A “demand curve” plots combinations of prices and quantity demanded. A change in price causes a shift along the demand curve. A shift along the demand curve is referred to as a “shift in the quantity demanded.” A shift in any other variable except price causes a shift in the entire demand curve. A shift in the entire demand curve is referred to as a “shift in demand.” Essential Question: What factors affect demand?

Price: Movements Along and Shifts of The Demand Curve Quantity Price Price increase moves us leftward along demand curve P2 Price decrease moves us rightward along demand curve P1 P3 Q2 Q1 Q3 Essential Question: What factors affect demand?

What factors affect demand? Income Changes in income can increase or decrease demand. A good whose demand decreases with an increase in income is called an “inferior good.” A good whose demand increases with an increase in income is called a “normal good.” Essential Question: What factors affect demand?

Income: A Shift of The Demand Curve Number of Bottles per Month Price per Bottle An increase in income shifts the demand curve for maple syrup from D1 to D2. D2 D1 At each price, more bottles are demanded after the shift B C $2.00 60,000 80,000 Essential Question: What factors affect demand?

Examples of changes in income An increase in income will reduce the demand for ramen noodles or generic products. An increase in income will increase the demand for cars or clothing. An increase in income will significantly increase the demand for air travel or jewelry. Essential Question: What factors affect demand?

What factors affect demand? Prices of other goods Changes in the prices of other goods can increase or decrease demand. A good that causes an increase in the demand for another good when its price increases is called a “substitute good.” A good that causes a decrease in the demand for another good when its price increases is called a “complementary good.” Essential Question: What factors affect demand?

Examples of changes in other prices An increase in the price of peanut butter will reduce the demand for jelly. Peanut butter and jelly are complements. An increase in the price of Pepsi will increase the demand for Coke. Pepsi and Coke are substitutes. Essential Question: What factors affect demand?

What factors affect demand? Number of buyers An increase in the number of potential buyers will increase the demand for the good. For example, the demand for land increases as the population increases. Similarly baseball tickets are generally more expensive in larger cities. Essential Question: What factors affect demand?

What factors affect demand? Future Prices An increase in the expected future price of a good increases current demand. A decrease in the expected future price of a good decreases current demand. For example, when a good is temporarily put on sale, people stock up on the good. Essential Question: What factors affect demand?

What factors affect demand? Tastes Demand curves can shift due to changes in tastes over time. For example, demand for cereal may be high in the morning but low at night. Advertising shifts demand curves because it plays an important role in many trends Essential Question: What factors affect demand?

What factors affect demand? Quality Demand curves can shift due to changes quality. At a given price, demand for Pizza Hut’s pizza is higher than the demand for Papa John’s. Similarly, DVDs cost more than VHS tapes because the picture is of higher quality. Essential Question: What factors affect demand?

Outward Shift of The Demand Curve Quantity Price Entire demand curve shifts rightward when: income or wealth ↑ price of substitute ↑ price of complement ↓ population ↑ expected price ↑ tastes shift toward good D2 D1 Essential Question: What factors affect demand?

Inward Shift of The Demand Curve Quantity Price Entire demand curve shifts leftward when: income or wealth ↓ price of substitute ↓ price of complement ↑ population ↓ expected price ↓ tastes shift away from good D1 D2 Essential Question: What factors affect demand?

Section 2 Review 1. Which of the following does not cause a shift of an entire demand curve? (a) a change in price (b) a change in income (c) a change in consumer expectations (d) a change in the size of the population 2. Which of the following statements is accurate? (a) When two goods are complementary, increased demand for one will cause decreased demand for the other. (b) When two goods are complementary, increased demand for one will cause increased demand for the other. (c) If two goods are substitutes, increased demand for one will cause increased demand for the other. (d) A drop in the price of one good will cause increased demand for its substitute.

Assignment Page 88 #1-8