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Change in expected future prices and demand

AP Macro: MKT‑2 (EU), MKT‑2.B (LO), MKT‑2.B.1 (EK) AP Micro: MKT‑3 (EU), MKT‑3.B (LO), MKT‑3.B.1 (EK)

Video transcript

- [Instructor] We've been talking about the law of demand and how if we hold all else equal, a change in price, if price goes up, the quantity demanded goes down, and if price goes down, the quantity demanded goes up. So if you hold all else equal, ceteris paribus, we are just moving along this curve depending on what price. But what we started talking about is what happens when you change some of those things that we have been holding equal, how does that change demand? In the last video, we talked about the price of related goods, price of related goods. And if the price of related goods change, both complements and substitutes, how that might change the, how that might increase or decrease demand, the entire curve, not just one particular scenario. Now let's talk about another one of those factors that we've been holding constant, and think about how that would change demand, the entire curve, if we were to change that, and that's expectations of future prices. I'll do that in this green. So expectations, expectations of future prices, of future, future prices. So let's say that, let's talk about a first scenario right over here, where, let's say that this curve, people didn't expect prices to change for my ebook. And now, all of a sudden, people expect, there's a change in expectation, now all of a sudden, they expect the prices to go up going forward. So now, now, now expect, expect the future price, the future price to go up. What's going to happen? If you expect the future price to go up, and the good or the product in question is something that you can store, well, and depending on how much you expect it to go up, you're probably more likely to buy it now, buy it before the price goes up. So regardless of what point on this curve we're at, regardless of the price point, at any one of those price points, people now, because they want to, instead of buying it later they want to buy it now, they are more, the current demand will go up at any of these price points. So at $2, more people will want to buy it 'cause they think it's gonna go up. At $4, more people will want to buy it 'cause they think it's gonna go up. At any of these price points, because now there's an, the expectations have gone from being neutral to now expecting prices to go up, it will shift the entire curve to the right. So this will shift the entire curve to the right. So this right over here is scenario one. And it depends how much this changes to say how much this shifts to the right. This is just a general idea, this is scenario one. And the shifting of the entire curve, you could say they increased demand. So this is literally demand increasing, demand, demand increased. And when we talk about demand, remember, and you're probably tired of me saying this, I'm not talking about a particular quantity. I'm talking about the entire curve shifting to the right because people expect future prices to go up, so the current demand went up, the current demand curve shifted to the right. And now we can just take the other side of that. Imagine what happens in scenario two. Before people were neutral, that was our curve right there. They didn't have any opinion about whether future prices were gonna go up or down, or maybe they just assumed they were gonna stay the same. And now they expect future prices to go down. Now expect future prices, future prices, to go down. And this is something that happens in consumer electronics all the time, you see, whenever you buy a laptop or any type of electronic device, we now assume that the prices will go down. Now what we're talking about is a change in expectations. So you're going from neutrality, or let's say you're going from, you expect them to go down, but now you expect them to go down even faster. And if all of a sudden you expect them to go down even faster, you're even less likely to buy them now. So if you expect, if before you thought prices were going to be roughly constant, and now you expect them to go down, now you're gonna say, well, hey, at any given price point, why don't I just hold off a little bit and wait a little bit? So it's going to lower demand. So in this scenario, the whole curve will shift to the left. At any given price point, the quantity demanded will go down at any point in that curve. And so, the entire demand curve will be shifted to the left. So because of scenario two, demand, demand was decreased, demand was decreased.