1. Factors Affecting Demand
Chapter 4, Section 2

2. Change in Quantity Demanded
A movement along the demand curve that shows a change in the quantity of the product purchased in response to a change in price.

3. The Income Effect
When prices drop, consumers pay less for the product and have some extra real income to spend.
Ex: At a price of $15 per CD, Larry and Curly spent $90 to buy six CDs.
If the price drops $10, they would spend only $60 on the same quantity – leaving them $30 “richer” because of the drop in price.
They may even buy more CDS.
This illustrates the income effect.
The change in quantity demanded because of a change in price that alters consumers’ real income.

4. The Substitution Effect
A lower price means the CDs will be relatively less expensive than other goods and services such as concerts and movies.
Consumers will have a tendency to replace a more costly item with a less costly item.
The substitution effect is the change in quantity demanded because of the change in the relative price of the product.

5. Change in Demand
Sometimes something happens to cause the demand curve itself to shift.
This is known as a change in demand because people are now willing to buy different amounts of the product at the same prices.
The entire demand curve shifts – to the right to show an increase in demand or to the left to show a decrease in demand for the product.
The demand curve can change for several reasons.
When this happens, a new schedule or curve must be constructed to reflect the new demand at all possible prices.
Demand can change because of changes in income, tastes, the price of related goods, expectations, and the number of consumers.

6. Price
Old (DD)
New (D’D’)
$30 1
$25 3
$20 6
$15 10
$10 15 $5 20

7. Demand Curve Shift

8. Consumer Income
Changes in consumer income can cause a change in demand.
When your income goes up, you can afford to buy more goods and services.
As incomes rise, consumers are able to buy more products at each and every price.
When this happens the demand curve shifts to the right.
Ex: Suppose that Larry and Curly get a raise, which allows them to buy more CDs.
Instead of Larry and Curly each buying 3 for a total of 6, they can now each buy 5 – for a total of 10.
This causes the curve to shift to the right.

9. Consumer Tastes Consumers do not always want the same things.
Advertising, news reports, fashion trends, the introduction of new products, and even changes in the season can affect consumer tastes.
Ex: a product is advertised in the media or on the internet, its popularity increases and people tend to buy more of it.
If consumers want more of an item, they would buy more of it at each and every price.
The demand curve shifts to the right.
In recent years, consumer concerns about health have greatly increased the demand for healthier, less fattening foods.
Demand for smaller, more fuel-efficient cars has grown, driven by a change in tastes.

10. Substitutes
A change in the price of related products can cause a change in demand.
Some products are known as substitutes because they can be used in place of other products.
Ex: butter and margarine are substitutes.
A rise in the price of butter causes and increase in the demand for margarine.
In general, the demand for a product tends to increase if the price of its substitute goes up.

11. Complements
Other related goods are known as complements, because the use of one increases the use of the other.
Personal computers and software are two complementary goods.
When the price of computers decreases, consumers buy more computers and more software.
If the price of computers goes up the demand for software goes down.

12. Change in Expectations
Refers to the way people think about the future.
Ex: suppose that a leading maker of audio products announces a technological breakthrough that would allow more music to be recorded on a smaller disk at a lower cost than before.
Even if the product is not available right now some consumers might decide to buy fewer musical CDs today simply because they want to wait for a better product.
There could also be the opposite effect.
It the weather forecasts a bad year for crops, people might stock up on some foods before they actually become scarce.

13. Number of Consumers
The increase in the number of consumers can cause the market demand curve to shift.
Ex: Suppose Moe, one of Larry’s and Curly’s old friends, now decides to purchase compact discs.
If we add the number of CDs that Moe would demand at each and every possible price to the others.
This would shift the market demand curve to the right.
If Larry or Moe left the market the total number of CDs purchased at each and every price would decrease.
This would shift the market demand curve to the left.