Chapter 4 Factors that may shift the demand
Chapter 4: Factors that may shift the demand curve
1. Understanding Demand
Definition of Demand: Demand refers to the quantity of a good or service that consumers are willing and able to purchase at various prices.
Demand Curve Diagrams: Illustrate changes in price leading to movements along the curve versus shifts in the curve indicating increased or decreased demand.
2. Demand Curve Shifts
Factors Influencing Demand Curve Shifts:
Advertising
Income
Fashion and Tastes
Price of Substitute Goods
Price of Complementary Goods
Demographic Changes
Other Factors (e.g. weather, climate, etc.)
Movements Along the Demand Curve:
Movement along the demand curve occurs only due to changes in the good's own price.
3. Income Effects on Demand
Normal Goods:
Definition: Goods for which demand increases as income increases (e.g., luxury items).
Example: Increase in income leads to higher demand for taxi services.
Inferior Goods:
Definition: Goods for which demand decreases as income increases.
Example: Demand for bus services may decrease as people can now afford taxis.
Wealth Effect:
Wealth increases demand as individuals have more assets/financial security.
Examples:
Stock market boom increases luxury items demand (shark fins).
Property boom increases leisure travel demand.
4. Price of Related Goods
Price of Substitute Goods:
Definition: Goods that can replace each other in consumption (e.g., Coca-Cola vs. Pepsi).
Effect on Demand:
If price of a substitute falls, demand for the original good falls (Coca-Cola price drop → Pepsi demand falls).
If price of a substitute rises, demand for the original good rises (Pork price increase → Beef demand increases).
Price of Complementary Goods:
Definition: Goods that are consumed together (e.g., cars and insurance).
Effect on Demand:
If the price of a complement rises, demand for the original good falls (car price rise → demand for insurance falls).
If the price of a complement falls, demand for the original good rises (gasoline price drop → demand for cars may increase).
5. Influences on Consumer Preferences
Fashion and Tastes:
Changes over time can lead to varying demand for certain goods (e.g., seasonal clothing).
Advertising:
Effective advertising can shift consumer preferences, thereby increasing demand.
6. Demographic Changes:
Population Growth: Leads to increased demand for various goods/services (e.g., housing).
Age Distribution: An aging population increases demand for health care and elder services.
Geographical Distribution: Urbanization increases demand for urban services like schools and hospitals.
7. Economic Factors
Expectations about Future Prices:
If consumers anticipate price increases, current demand often increases.
Interest Rates:
Higher interest rates can reduce borrowing, leading to decreased demand for goods bought on credit (e.g., homes, cars).
Income Tax Levels:
Increases in income tax reduce disposable income, leading to a decrease in demand.
8. Climate and Weather Effects
Seasonal weather can influence demand for specific goods (e.g., air-conditioners in summer).
9. Derived Demand:
Demand for one good can affect demand for another (e.g., furniture and wood).
10. Key Vocabulary:
Disposable Income: Income available for spending after taxes.
Normal Goods: Goods for which demand increases when income increases.
Inferior Goods: Goods for which demand decreases as income increases.
Substitute Goods: Goods that can be replaced by each other.
Complementary Goods: Goods that are used together, affecting each other's demand.
11. Case Studies:
Holiday Treat Example: Illustrates how income and advertising influence demand for travel services.
UAE Growth: Immigration and its impact on local demand patterns.
12. Quiz Questions:
Identify complements and substitutes.
Analyze how changes in specific economic factors influence demand.