Main content
Microeconomics
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
© 2023 Khan AcademyTerms of usePrivacy PolicyCookie Notice
Change in expected future prices and demand
This transcript discusses how changes in expectations of future prices can affect demand. If people expect prices to go up, they're more likely to buy now, shifting the demand curve to the right. If they expect prices to go down, they're likely to hold off on buying, shifting the demand curve to the left. Created by Sal Khan.
Want to join the conversation?
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)
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.(25 votes)
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?(8 votes)
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.(10 votes)
- 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)
- The demand curve would shift to the right, it would not move along the curve.(8 votes)
What is the difference between a change in demand and a change in quantity demanded?(2 votes)
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.(7 votes)
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)
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)
What is price of related good mean? What does price of related goods do?(3 votes)
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)
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)- 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)
- please explain what a linear demand curve is.(2 votes)
It is a linear demand curve is if the graph is a straight line instead of a curve.(2 votes)
- What makes people think that a price of a product will go up or down in the future?(1 vote)
- Lots of things! For example, I know that if a hurricane hits in the gulf coast, supplies of gas might run short as the storm interrupts fuel deliveries, so I expect prices to go up.(5 votes)
Are there any situations where the demand curve actually changes shape as opposed to just moving?(2 votes)
Yes, demand curves will change shape all the time. Almost all of the factors will affect the quantity demanded at some prices more than at others.(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.