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Change in expected future prices and demand

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A demand shifter is a change that shifts the demand curve for a product. One of the demand shifters is buyers' expectations. If a buyer expects the price of a good to go down in the future, they hold off buying it today, so the demand for that good today decreases. On the other hand, if a buyer expects the price to go up in the future, the demand for the good today increases. Explore the role of buyers' expectations as a determinant of demand in this video. Created by Sal Khan.

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  • blobby green style avatar for user ellenmaassen
    How are these relations: the shape of the curve (hyperbolic, not linear), the way the curve changes under certain circumstances (such as a rightward shift with increased prices for a substitute), determined? Based on what data? I can also imagine cases where with more expensive substitutes the demand will decrease instead of increase, because if something is perceived as cheap it can become less desirable, instead of more (especially with particular products). Or does it maybe depend on where in the curve we are wether it shifts left or right? Also very imaginable. So from which data are the shapes of these curves and the nature of the changes derived? And do they always hold?
    (4 votes)
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    • hopper jumping style avatar for user ANATOLIY PUSHKARYOV
      Hello, EllenMaassen, the shape of the curve derived from the price elasticity of demand. But I think we should start from the law of demand Salman mentions at the beginning of the video. It is true what you said is that with some products the lower the price the less of it you desire, but those are a specific case called inferior products. An example of it would be a margarine. Margarine was invented as a substitute for the butter for poor people and soldiers. As my income increases, I would eat less of the margarine and buy more of a natural butter. You can say my income is rising or you can say that the price of the milk butter is falling, the same thing. So as I can afford the more expensive stuff I buy it. It is not expensive for me anymore. My income increases or the price is falling and I buy more iPhones, iMacs, iPads, Ferrari, or a very expensive Yacht I kept my eye on for a while. That is the law of demand. No matter how badly you want something if you don't have enough money you can not afford it. And as something becomes cheaper you usually buy more of it. You might ration your money buying ice cream cones and instead of indulging into three you buy just one since it is too expensive. But, as the price goes down those craved milky cream icy desserts become more attractive to you and more affordable. You don't think about saving some money for an entertainment in the park because you can afford both park and the cones! That is the law of demand. It assumes of course that the goods are normal and it also assumes the concept of ceteris paribus which means nothing else is changing. As something gets cheaper people buy more of it. Maybe not much more, but with many people, it adds up.
      That is where the shift of the curve comes into place. You are right Ellen that sometimes to see the change we have to know where in the curve we are. But, that is only for a single consumer or for a single group of consumers. At some points of the curve, people buy more as the price decreases at some people buy less with the same price decrease. That is why the shape of the curve is parabolic and not linear. If at any price change people were changing the same quantity purchased the line would be linear. It is easy to understand if you imagine a square. Since all of the sides of the square are the same, if you draw the line from one corner to the other it would be perfectly linear, perfectly dividing 90 degrees angle into two of 45. Our graph is made up of those many squares. You can count each graduation on the line as a square. And X and Y axes as the sides of this square. So if both sides are equal, that means if both the change in price and change in quantity is the same then the line that connects the corners is a perfectly straight 45 degrees line. If you combine all those straight 45 degrees lines of all of those squares you would get one long straight 45 degrees line.
      Now, to the rightward shift of the demand curve as the price of substitutes rises. You can get the data if you run an experiment, and I am sure there were economists who did that for you since Adam Smith (1723 - 1790) who considered to be the first introductor of the concept. But it is easier to understand why it is true if you think of your or anyone's daily life. Let's consider meat. Chicken and Beef are the substitutes among many others. So as the price of beef goes up people eat more chicken, right? If they have taste for meat and they cannot afford beef they buy chicken. So the demand for chicken rises at any point of the demand curve. That is why it shifts rightward. Since on the horizontal axis, we have quantity so as the quantity rises for any point of the price the curve shifts.
      It is true that when you go to the market there is no range of the prices and quantities just like at the demand curve, but the curve reflects all the possibilities that might happen. When the price is infinite and the quantity demanded is zero and when the price is zero and the quantity demanded is infinite. That is why when the price of a substitute product such as beef goes up the overall demand for chicken goes up. It does not matter whether the price of the chicken is five dollars or ten dollars in both cases there would be more people buying both at five and ten. It does not mean of course that the quantity demanded is the same, otherwise, it violates the law of demand. It is always more people buying at five dollars than at ten, but as there is no other choice (beef is too expensive) people buy more both at five and ten.
      Dear Ellen, I tried to answer your question as short as possible. But, your question covers many areas of the economics, so it is very difficult to answer it in one sentence.
      Please let me know if there are any blind spots or if you have any questions I would be happy to answer them.
      Sincerely, Anatoly.
      (14 votes)
  • blobby green style avatar for user michael levasseur
    what would happen if just demand would change? for example more people are deciding to buy iphones would the demand curve for iphones shift or would it just move down to the right along the line?
    (6 votes)
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  • leafers ultimate style avatar for user Kylle Morrison
    So basically, when people think the price is going to go up, more people buy the product and when people think the price is going to get lowered, they wait until the price lowers?
    (4 votes)
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    • male robot hal style avatar for user Enn
      Yes, when people think that the price will go up, they will start buying more at the current price so that they will not have to buy the same at a higher price.
      Similarly when the price is expected to fall, people will hold their purchases until the price lowers.
      (3 votes)
  • starky tree style avatar for user GothicWidow90
    What is price of related good mean? What does price of related goods do?
    (3 votes)
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    • duskpin ultimate style avatar for user Israel Zinns
      A related good (a computer, a car, etc.) is either a substitute to a good or a complement to a good (used in conjunction with). So I have a car, a motorcycle would be a substitute and the tires for both would be a complement. The prices of all of these goods are tied together in some fashion because they are related to one another.
      (4 votes)
  • leaf blue style avatar for user Zestfulmocha
    Would it be fair to assume that change in expected future prices for 'service demand' (as opposed to 'product demand') would be irrelevant?
    (3 votes)
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    • male robot hal style avatar for user Patrick Sykes
      It should be relevant, so long as people have the option to wait or have the service sooner.

      A recent example from my local area is the demand for solar panel installation when the government announced a subsidy program and later when they announced the end of the program. People waited for the beginning of the program to have their panels installed (lowering demand) and then rushed to have it done when the program was close to ending (increased demand).
      (4 votes)
  • aqualine ultimate style avatar for user Tré McLeod
    What is the difference between a change in demand and a change in quantity demanded?
    (2 votes)
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    • piceratops seed style avatar for user 0seanses0
      Demand is the "relationship" between "quantity demanded" and "price", so when plotted in a figure, demand is like a curve where "quantity demanded" and "price" are axes. Thus a change in demand is shifting this curve while a change in "quantity demanded" indicates another point on this exact curve.
      (4 votes)
  • blobby green style avatar for user Diana Madumo
    please explain what a linear demand curve is.
    (2 votes)
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  • blobby green style avatar for user rancejumawan
    What makes people think that a price of a product will go up or down in the future?
    (1 vote)
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  • starky ultimate style avatar for user Savana Green
    Are there any situations where the demand curve actually changes shape as opposed to just moving?
    (2 votes)
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  • leafers seedling style avatar for user Mia
    How does this apply to sales in stores? Are stores relying on pent up quantity demand for the day that they specify the price will drop?
    (2 votes)
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    • leaf green style avatar for user macgregor.d
      Stores know, or expect, that if they lower prices they will increase the quantity demanded. In practice you can see how stores attempt to increase demand when they have big seasonal sales, such as a boxing day sale, in order to sell off their inventories.
      (2 votes)

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.