day 5 part 3 Microeconomics: Shifts in the Demand Curve

Introduction to Shifts in the Demand Curve

• The goal is to understand how the relationship between price and quantity demanded changes when external factors—other than the price of the good itself—fluctuate.

The Mechanism of a Demand Curve Shift

• Initial Baseline ($D_0$): We begin with a given demand curve, labeled $D_0$, representing the relationship between the price ($P$) and the quantity demanded ($Q$) for all buyers in a market or for an individual buyer.

• The Intuition of Change: If an external factor changes (e.g., a consumer becomes wealthier or develops a new preference, more move to town), their willingness to pay for a product at various prices evolves.

• Visualizing the Shift:     * At an initial price of $P_1$, the quantity demanded was $Q_1$ (e.g., during a pandemic period).     * When students return, at that same price $P_1$, the market quantity demanded increases to $Q_2$, where Q_2 > Q_1.     * Because this increase in quantity demanded occurs at every price point, a new demand curve ($D_1$) is formed to the right of the original curve.     * Rightward Shift: Represents an increase in demand.     * Leftward Shift: Represents a decrease in demand (e.g., if buyers suddenly dislike pizza relative to calzones).

Formal Determinants (Shifters) of Demand

There are five primary factors that cause a demand curve to shift formally:

1. Tastes and Preferences

• Directly affects the desirability of a good.

• Example: If consumers develop a preference for calzones over pizza, the demand for pizza will shift to the left (decrease) because consumers want less pizza at every price.

2. Income and Wealth

• The effect of income changes depends on the classification of the good:     * Normal Goods: A good for which demand increases when income or wealth increases. The demand curve shifts to the right ($D$ increases).         * Example: Airplane tickets or a meal at a high-quality Japanese ramen shop.     * Inferior Goods: A good for which demand decreases when income or wealth increases. The demand curve shifts to the left ($D$ decreases).

3. Availability and Prices of Related Goods

• Complements: Goods that are consumed together or "mixed" together.     * Examples: Socks and shoes; coffee and creamer.     * Relationship: If the price of shoes decreases, the quantity demanded of shoes increases. Consequently, because people are wearing more shoes, the demand for socks shifts to the right (increases).

• Substitutes: Goods that are used instead of one another; typically, they are generally not consumed together     * Example: Tea and coffee.     * Relationship: If the price of coffee increases, the law of demand dictates that the quantity demanded of coffee will fall. To compensate for the lack of caffeine, consumers will switch to tea, causing the demand for tea to shift to the right (increase) at each price.

4. Number and Scale of Buyers

• An increase in the number of consumers in a market leads to a rightward shift in demand.

• 5. Buyers' Expectations about the Future

• If consumers expect future changes, they may adjust their current purchasing behavior.

Movement Along vs. Shifts of the Demand Curve

• The Function of Quantity Demanded: Quantity demanded ($QD$) can be viewed as a function:     $QD = f(\text{Own Price, Tastes/Preferences, Income/Wealth, Related Goods Prices, Number of Buyers, Future Expectations})$

• Ceteris Paribus (All else equal): When drawing a demand curve, economists assume that everything except the "own price" (the price of the product itself) is fixed or constant.

• Movement Along the Curve: Occurs when the price of the product itself changes.

• Shift of the Curve: Occurs when any factor other than price (the shifters listed above) changes. This changes the entire relationship between price and quantity, resulting in a new curve (e.g., $D_1$).

Case Study: The Estimated Demand Curve for Oil

• Variables:     * Vertical Axis: Price per barrel of oil in USD ($P/barrel$).     * Horizontal Axis: Quantity in billions of barrels per year ($Q$).

• Technical Detail: One barrel of oil is exactly $42\,gallons$.

• Data Point: At a price of $\$100$ per barrel, the quantity demanded is $35\,billion$ barrels per year ($QD = 35$ at $P = 100$).

Questions & Discussion

Question 5: How is the effect of a change in price on the demand curve different from the effect of a change in the other determinants (tastes, income, etc.)?

• Response: A change in the price of the good itself results in a movement along the existing demand curve. A change in any other determinant (like tastes, income, or the price of related goods) results in a shift of the entire demand curve to a new position.