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Course: Microeconomics > Unit 2
Lesson 1: Demand- Law of demand
- Law of demand
- Market demand as the sum of individual demand
- Substitution and income effects and the law of demand
- Price of related products and demand
- Change in expected future prices and demand
- Changes in income, population, or preferences
- Normal and inferior goods
- Inferior goods clarification
- What factors change demand?
- Lesson summary: Demand and the determinants of demand
- Demand and the law of demand
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What factors change demand?
Price isn't the only factor that affects quantity demanded.
Key points
- Demand curves can shift. Changes in factors like average income and preferences can cause an entire demand curve to shift right or left. This causes a higher or lower quantity to be demanded at a given price.
- Ceteris paribus assumption. Demand curves relate the prices and quantities demanded assuming no other factors change. This is called the ceteris paribus assumption. This article talks about what happens when other factors aren't held constant.
What factors affect demand?
We defined demand as the amount of some product a consumer is willing and able to purchase at each price. That suggests at least two factors in addition to price that affect demand.
Willingness to purchase suggests a desire, based on what economists call tastes and preferences. If you neither need nor want something, you will not buy it. Ability to purchase suggests that income is important. Professors are usually able to afford better housing and transportation than students because they have more income.
Prices of related goods can affect demand also. If you need a new car, the price of a Honda may affect your demand for a Ford. Finally, the size or composition of the population can affect demand. The more children a family has, the greater their demand for clothing. The more driving-age children a family has, the greater their demand for car insurance, and the less for diapers and baby formula.
The ceteris paribus assumption
A demand curve or a supply curve is a relationship between two, and only two, variables: quantity on the horizontal axis and price on the vertical axis. The assumption behind a demand curve or a supply curve is that no relevant economic factors, other than the product’s price, are changing. Economists call this assumption ceteris paribus, a Latin phrase meaning “other things being equal”. If all else is not held equal, then the laws of supply and demand will not necessarily hold. The rest of this article explores what happens when other factors aren't held constant.
How does income affect demand?
Say we have an initial demand curve for a certain kind of car. Now imagine that the economy expands in a way that raises the incomes of many people, making cars more affordable and that people generally see cars as a desirable thing to own. This will cause the demand curve to shift.
When a demand curve shifts, it does not mean that the quantity demanded by every individual buyer changes by the same amount. In this example, not everyone would have higher or lower income and not everyone would buy or not buy an additional car. Instead, a shift in a demand curve captures a pattern for the market as a whole.
Normal and inferior goods
A product whose demand rises when income rises, and vice versa, is called a normal good. A few exceptions to this pattern do exist, though. As incomes rise, many people will buy fewer generic-brand groceries and more name-brand groceries. They are less likely to buy used cars and more likely to buy new cars. They will be less likely to rent an apartment and more likely to own a home, and so on. A product whose demand falls when income rises, and vice versa, is called an inferior good. In other words, when income increases, the demand curve for an inferior good shifts to the left.
Other factors that shift demand curves
Income is not the only factor that causes a shift in demand. Other things that change demand include tastes and preferences, the composition or size of the population, the prices of related goods, and even expectations. A change in any one of the underlying factors that determine what quantity people are willing to buy at a given price will cause a shift in demand.
Graphically, the new demand curve lies either to the right (an increase) or to the left (a decrease) of the original demand curve. Let’s look at these factors.
Changing tastes or preferences
From 1980 to 2014, the per-person consumption of chicken by Americans rose from 48 pounds per year to 85 pounds per year, and consumption of beef fell from 77 pounds per year to 54 pounds per year, according to the U.S. Department of Agriculture (USDA). Changes like these are largely due to movements in taste, which change the quantity of a good demanded at every price—that is, they shift the demand curve for that good, rightward for chicken and leftward for beef.
Changes in the composition of the population
The proportion of elderly citizens in the United States population is rising. It rose from 9.8% in 1970 to 12.6% in 2000 and is projected by the U.S. Census Bureau to be 20% of the population by 2030.
A society with relatively more children, like the United States in the 1960s, will have a greater demand for goods and services like tricycles and daycare facilities. A society with relatively more elderly persons, as the United States is projected to have by 2030, has a higher demand for nursing homes and hearing aids. Similarly, changes in the size of the population can affect the demand for housing and many other goods. Each of these changes in demand will be shown as a shift in the demand curve.
Related goods
The demand for a product can also be affected by changes in the prices of related goods such as substitutes or complements. A substitute is a good or service that can be used in place of another good or service. As electronic resources, like the one you are reading now, become more available, you would expect to see a decrease in demand for traditional printed books. A lower price for a substitute decreases demand for the other product.
For example, in recent years as the price of tablet computers has fallen, the quantity demanded has increased because of the law of demand. Since people are purchasing tablets, there has been a decrease in demand for laptops, which can be shown graphically as a leftward shift in the demand curve for laptops. A higher price for a substitute good has the reverse effect.
Other goods are complements for each other, meaning that the goods are often used together because consumption of one good tends to enhance consumption of the other. Examples include breakfast cereal and milk; notebooks and pens or pencils; golf balls and golf clubs; gasoline and sport utility vehicles; and the five-way combination of bacon, lettuce, tomato, mayonnaise, and bread. If the price of golf clubs rises, the quantity demanded of golf clubs falls because of the law of demand, and demand for a complement good like golf balls decreases along with it. Similarly, a higher price for skis would shift the demand curve for a complement good like ski resort trips to the left, while a lower price for a complement has the reverse effect.
Changes in expectations about future prices or other factors that affect demand
While it is clear that the price of a good affects the quantity demanded, it is also true that expectations about the future price—or expectations about tastes and preferences, income, and so on—can affect demand. For example, if people hear that a hurricane is coming, they may rush to the store to buy flashlight batteries and bottled water. If people learn that the price of a good like coffee is likely to rise in the future, they may head for the store to stock up on coffee now. These changes in demand are shown as shifts in the curve. Therefore, a shift in demand happens when a change in some economic factor other than price causes a different quantity to be demanded at every price.
Summing up factors that change demand
Six factors that can shift demand curves are summarized in the graph below. Notice that a change in the price of the good or service itself is not listed among the factors that can shift a demand curve. A change in the price of a good or service causes a movement along a specific demand curve, and it typically leads to some change in the quantity demanded, but it does not shift the demand curve.
When a demand curve shifts, it will then intersect with a given supply curve at a different equilibrium price and quantity. We are, however, getting ahead of our story. Before discussing how changes in demand can affect equilibrium price and quantity, we first need to discuss shifts in supply curves.
Want to join the conversation?
in the ques above, wouldnt the demand of that car decrease if the income increases?
if yes then pls correct the answer.
if no, then pls make me understand.
#dilemma(4 votes)
No, the demand increases as it is more likely that people buy a car when the income increases. Don't confuse this question with the example for "inferior" goods, as this question is just general.(26 votes)
Is bread a normal or an inferior goods? I'm not sure. If it is a normal good, when the income increases the demand will not rise much, because a person can't eat 100 breads a day. If it is a inferior good, it do not make sence too. When the income decreases, people still have to buy bread to eat, so the demand will not fall.
Thank you ! ! :)(7 votes)- Bread can be considered a necessity good and so will be a normal good. However the increase in its demand will not be in proportion to the increase in income.
An inferior good in contrast is a good whose demand falls with an increase in the consumer's income, that is its income elasticity is negative.
Some varieties of bread may be inferior, like if they have a superior and costlier variety available like maybe organically made bread.(8 votes)
- I couldn't understand the "Ceteris Paribus Assumption". Can anyone explain me with an example? I know what the phrase means but I cannot understand what Sal is trying to tell here.(5 votes)
like if you flip two quarters to see if you can get the same outcome you need Ceteris Paribus Assumption or "Everything else the same" outside of the quarters(6 votes)
Doesn't advertising shift the demand curve?(1 vote)
Yes, advertising also shifts the demand curve. I think that's included in the 'Population likely to buy rises'.(12 votes)
The higher demand Demand, the higher you can make the cost of the product, then as the demand goes down you lower the prices in order to make the maximum amount of money? right?(3 votes)
If I had to reply based solely on the previous lessons I'd say you got it backwards. Price is the independent variable and demanded quantity is the dependent variable, thus you should say the following: the higher the price, the lower the demanded quantity. This model also assumes that all the other variables are kept constant (ceteris paribus assumption), which is quite far from the truth but it's a good point to start.(1 vote)
- Hi,
In the second paragraph of 'How does income affect demand?', it is said that "Instead, a shift in a demand curve captures a pattern for the market as a whole."
If the market is getting captured as a whole, isn't this macroeconomics?
Please help. Thank You
PS. I am totally new to economics(1 vote)- With 'the market as a whole' they mean the entire car market.
The study of an individual market is often considered to be part of microeconomics, while macroeconomics is normally about whole economies.
But the difference between microeconomics and macroeconomics isn't very black and white, so macro-economists sometimes study whole markets as well.(5 votes)
does an increase in tax shift the demand curve?(2 votes)- Is it right to say that amazon and delivery goods services are complements goods? if amazon changes their prices due to shortage of transportation what will happened to the demand? is it a shift factor or movement along the curve?(1 vote)
If it costs me more to have my socks delivered every time I order them online, it doesn't matter what the actual price is. Whatever the price is it effectively costs me more, so at every possible price I am willing to buy less. That means the demand curve shifts.(3 votes)
- What effect does 'Supply and Demand" have on employment?(1 vote)
Employment has an effect on supply and demand, but it is less so the other way around. If wages are high, then that means that the input costs are higher, which means supply moves over to the left. If employment and wages are higher, then that means that people's income is higher, which means demand shifts over to the right, unless this is an inferior good. Which effect is greater depends on many different factors.
There is still some effect. The greater the quantity, the more workers you would need, and so employment would be higher. So, increasing supply and demand would increase employment. However, this is more of a macroeconomic thing than microeconomics.(2 votes)
- why does the demand curve always slope downwards(1 vote)
The demand curve slopes downward because according to the law of demand, if prices decreases then the quantity demanded increases (vice versa) assuming there are no other factors that could impact the demand curve.
So if you pick a point at the top of the slope where price (y-axis) is the highest, the corresponding x-axis value (quantity demanded) will be the lowest. This is because, the demand for normal goods at higher prices will be less based upon general human behavior in a market context.
Now if you pick a point that is lower on the slope of the curve, you will see that the price is lower, and the corresponding quantity demanded is higher.(2 votes)
