Module: Understanding Demand and Its Determinants

Demand Curve Fundamentals

The demand curve slopes downwards to the right.
It is drawn from the perspective of the consumer.
Demand is a function of income and other factors.

Market Demand

Individual Demand Example:
- Person A: Can afford $1$ theater ticket at a price of $100$ . If the price is cut to $50$ , she can buy $2$ tickets.
- Person B: Can only buy theater tickets if the price is $50$ . She can buy $1$ ticket at $50$ but $0$ at $100$ .
Total Market Demand:
- If price is $100$ : Total market demand is $1$ (Person A only).
- If price drops to $50$ : Total market demand is $3$ (Person A buys $2$ , Person B buys $1$ ).
Horizontal Summation:
- Market demand is obtained by adding individual demand curves (e.g., Tom's, George's, Lisa's, Mike's demand for tutoring) horizontally.
- This is done horizontally because changes in demand and supply are conceptualized as shifts left or right, even if they appear to move upwards/downwards along a slope.

Determinants of Demand

These factors determine the shape and position of the demand curve.
Basic Assumption: The single plant, single product assumption a simplification where every firm produces only one product from one facility. This assumption will be removed later in the semester.
The Determinants are:
1. Preference
2. Price (of the good itself)
3. Price of Related Products
4. Number of Consumers in the Market
5. Consumers' Income
6. Price Change Expectations
Importance of Determinants:
- While many texts list price as the most important, preference can override price (e.g., an animal rights activist would not buy a fur coat even at $1$ cent).
- All determinants are equally important in affecting demand.

Change in Quantity Demanded vs. Change in Demand

Change in Quantity Demanded:
- Occurs only when the price of the good itself changes.
- Represented as a movement along the existing demand curve.
- An increase in price (e.g., from $P<em>1$ to $P</em>2$ ) causes an upward movement along the curve, decreasing quantity demanded (e.g., from $Q<em>1$ to $Q</em>2$ ). A decrease in price causes a downward movement, increasing quantity demanded.
- Ceteris Paribus: Assumes all other determinants remain constant. Price changes first, then quantity demanded.
- Example: A successful advertising campaign for a product will not change the quantity demanded because advertising does not change the price of the product.
Change in Demand:
- Occurs when any other non-price factor or a combination of non-price factors changes.
- Represented as a shift of the entire demand curve (left or right).
- Question: If a firm successfully advertises its product, why does that not change the quantity demanded? Because advertising successfully changes preference, not price. If successful, demand shifts (to the right). If unsuccessful, it doesn't shift. If success is unknown, there's insufficient information.

Detailed Analysis of Non-Price Determinants

Preference:
- Increase in Preference: Demand curve shifts to the right (e.g., successful advertising).
- Decrease in Preference: Demand curve shifts to the left.
- Example: Manufactured Baby Food:
  - 1945-1965 (One Wage Earner): More parents stayed home, made their own baby food. Demand for manufactured baby food (Gerber, Beech Nut) shifted to the left.
  - After 1965 (Two Wage Earners/Changing Roles): Less parents stayed home, couldn't make their own. Demand for manufactured baby food shifted to the right.
  - Late 1970s (Preference for Non-Processed): Preference for natural ingredients led parents to make their own again. Demand for manufactured baby food shifted to the left.
Number of Consumers in the Market:
- Increase in Consumers: Demand curve shifts to the right for most products.
- Example: Hypothetically, if immigration policies were relaxed (allowing more people, assuming no criminal record or quarantinable disease), demand for almost all products would shift to the right.
Consumers' Income:
- This distinguishes between Normal Goods and Inferior Goods.
- Normal Good: As income increases, the demand curve shifts to the right (consumers buy more).
- Inferior Good: As income increases, the demand curve shifts to the left (consumers buy less).
- Example: Generic products vs. Name Brand products. Generally, as income increases, individuals buy fewer generic products (inferior good) and more name brand products (normal good). The reasons can be psychological.
Price Change Expectations:
- Expected Price Increase Tomorrow: Demand curve shifts to the right today (consumers buy now to avoid higher future prices).
- Expected Price Decrease Tomorrow: Demand curve shifts to the left today (consumers wait to buy at the lower future price).
- Real-World Examples: "Hurry in before the price increase!" campaigns.
Price of Related Products:
- Unrelated Products: No impact on each other's demand (e.g., blackboard erasers and replacement tires).
- Substitutes: Products used instead of each other (e.g., Dell and HP computers).
  - If the price of HP computers decreases, the quantity demanded for HP computers increases.
  - Assuming total computer demand is constant, if more HP computers are bought, then demand for Dell computers will shift to the left (people buy less Dell).
- Complements: Products used with each other (e.g., $35$ mm camera and $35$ mm film).
  - If the price of a complement (like $35$ mm film) decreases, the demand for the other product (the $35$ mm camera) would shift to the right.

Hypothetical Scenarios and Deeper Discussions

Planned Obsolescence:
- Context: Discussion on whether manufacturers intentionally design products to become obsolete (e.g., light bulbs, auto industry).
- Historical Example (1970s Auto Industry): Prior to the $1973$ Arab oil embargo, American car manufacturers focused on "muscle cars" with low miles per gallon $(MPG)$ . Miles per gallon was not a consideration; it was often "gallons per mile." After $1973$ , with gas rationing and long lines, fuel efficiency became critical.
- The Argument: It's argued that car companies were in a predicament: produce what people want (muscle cars) or what circumstances demand (fuel-efficient cars). Decisions were split.
- Conclusion: "Planned obsolescence" itself is problematic to analyze economically unless legal intent of manufacturers can be proven. Without proof of intent, economists shouldn't dedicate time to its impact on demand curves.
Logical Fallacies/Misconceptions:
- Leaf Blower Example: Illustrates inefficient and self-defeating actions (blowing leaves to a neighbor, attempting to evaporate a puddle with a leaf blower).
- Refrigerator Freezer Example: Leaving a refrigerator freezer open to cool a room is counter-productive because the condenser works harder, creating more heat, making the room hotter.

Application Questions and Exam Prep

Question 1: There is an increase in the number of consumers in the market. There is a decrease in consumers' income (for the same product). What happens to the demand curve?
- Answer: Insufficient information. An increase in consumers shifts demand right; a decrease in income shifts demand left (for a normal good) or right (for an inferior good). Without knowing the magnitude of these changes or the type of good, the net effect on the demand curve is unknown.
- Clarification: If the question specified that the increase in consumers was exactly the same amount as the decrease in income, then the shifts would offset each other, and the demand curve would remain fixed (assuming normal good).
Question 2: There is a successful advertising campaign for a specific brand of cell phones (e.g., iPhone). What will happen to the demand for cell phones by individuals over the age of $90$ ?
- Analysis: A successful ad campaign affects preferences, causing a change in demand (a shift). However, for a specific demographic (over $90$ ), a cell phone ad campaign may have no impact at all on their preferences or demand due to various factors (e.g., lack of interest, technological barriers, established habits).
Exam Focus: The exam will require applying the distinction between a change in quantity demanded and a change in demand to various scenarios.