2.3 Demand Shifters Lecture

Understanding Demand Shifts

Relationship Between Income and Demand

• Normal Goods:

  • Definition: Goods for which demand increases as income rises.

  • When income rises, consumers are willing to purchase more, causing the demand curve to shift to the right.

• Inferior Goods:

  • Definition: Goods for which demand decreases as income rises.

  • With increased income, individuals tend to buy higher-quality substitutes, resulting in a leftward shift of the demand curve.

  • Example: Inexpensive posters in dorm rooms are replaced with prints or original art as income increases.

Impact of Income Changes

• As income increases, the demand for inferior goods like pizza may decrease due to consumers switching to higher-end options such as steak dinners.

• Conversely, if incomes fall, the willingness to pay for normal goods decreases, shifting the demand left.

Changes in Preferences and Demand

• Shifts in consumer preferences can drastically affect demand.

  • Example: If a new trend for pizza diets arises, the demand curve may shift to the right, meaning more people want pizza at every price.

• On the other hand, if preferences shift against pizza, potentially opting for burritos instead, this shifts the demand curve left even without a price change.

Prices of Related Goods

• Substitutes:

  • When the price of substitute goods increases, demand for the original good increases (demand curve shifts right).

  • Example: If burritos become more expensive, consumers may turn to pizza instead.

• Complements:

  • Goods that are typically used together; a rise in the price of one will decrease demand for the complementary good.

  • Example: An increase in gasoline prices may lead to a decrease in pizza purchases, shifting the demand curve to the left.

  • Conversely, if the price of a complement decreases, demand for the paired good will increase, shifting the curve to the right.

Market Size and Demographics

• An increase in market size, such as population growth, will shift the demand curve to the right, leading to higher demand for products like pizza.

• Changes in demographics also influence demand:

  • Example: An aging population may reduce demand for certain products like pizza, shifting the demand curve left.

Expectations About Future Prices

• Expected future price changes can impact current demand:

  • If consumers anticipate lower prices in the future (e.g., a promotional 'free pizza week'), they may buy less now, shifting demand left.

  • Conversely, if future prices are expected to rise, current demand may increase, shifting the curve right.

Conclusion

• Understanding factors that shift the demand curve is crucial for predicting how demand will respond to various economic changes.

• Always consider how changes in consumer behavior, preferences, and external factors can influence market demand.