Change in Demand• Factors Which Cause a Change in

Demand– Number of Buyers– Tastes and Preferences– Income– Price of Other Goods– The Availability of Credit– Expectations about Future Prices

Change in Demand - Number of Buyers

The more buyers in the market for a good, the greater the total quantity demanded of the good at a given price. Since the quantity demanded is higher at every given price, the demand has increased.

Likewise, if there are less buyers in the market there is less quantity demanded at every price, so demand has decreased.

Change in Demand - Tastes and Preferences

• Let’s say we find out that wearing sunglasses can improve your vision? If consumers prefer a good more, the demand for the good increases (a rightward shift of the demand curve).

• What if we find out wearing sunglasses causes cataracts? If consumers prefer a good less, the demand for the good decreases (a leftward shift of the demand curve).

Change in Demand - Income

• Let’s say that you graduate and start making a substantial income. What might we expect to happen to the amount of sunglasses you would want to buy?

Change in Demand - Income

• Let’s say that after a year at your new job the boss cuts salaries by 30%. What happens to Demand?

Normal and Inferior Goods• Given the info. we have, we can say

that sunglasses are a “normal good”• Normal Good - any good which increases

in demand as income increases (and vice-versa)

• Now let’s consider Mac & Cheese. What happens to your demand for Mac and Cheese when you get a job?

Normal and Inferior Goods• If your boss cuts your income, though

you might start eating more Mac and Cheese. This means that Mac and Cheese is an “inferior good”• Inferior Good - any good which decreases

in demand as income increases (and vice-versa)

Change in Demand - Price of Other Goods

• Stouffer’s meals are a lot like Hungry-Man meals, but have a better quality. They are presently more expensive than Hungry-Man meals.

• What would happen to the Demand for Hungry-Man if the price of Stouffer’s fell?

Change in Demand - Price of Other Goods

• What would happen to the Demand for Hungry-Man if the price of Stouffer’s rose?

• This relationship between Hungry-Man and Stouffer’s implies they are “substitutes.”• Substitute - a good which can be

consumed in place of another good

Change in Demand - Price of Other Goods

• Thus an increase in the price of a substitute will increase the demand for the good

• And a decrease in the price of a substitute will decrease the demand for the good

Change in Demand - Price of Other Goods

• What if the price of microwaves goes up? What ought to happen to the demand for Hungry-Man meals?

Change in Demand - Price of Other Goods

• What if the price of microwaves goes down?

• This relationship between Hungry-Man meals and microwaves implies they are “complements.”• Complement - a good which is consumed

along with the consumption of another good

Change in Demand - Price of Other Goods

• Example - Peanut Butter and Jelly are complements.• If price of peanut butter increases,

consumers purchase less peanut butter• Law of demand tells us this

• Result - Consumers purchase less jelly• Since buy less peanut butter need less jelly for

PB&J sandwiches

Change in Demand - Price of Other Goods

• Thus, either of the following will increase Demand• Price of a substitute good increases• Price of a complement good decreases

• And either of the following will decrease Demand• Price of a substitute good decreases• Price of a complement good increases

Change in Demand - Availability of Credit

• If it is easier to borrow money (credit cards have lower interest rates or are easier to obtain, etc.), do you think people will buy more or less of a good at a given price?

Change in Demand - Availability of Credit

• If it is harder to borrow money, what do you think will happen to the demand for a good?

Change in Demand - Expectations about Future

Prices

• If we were to hear a new story about how CD prices were going to go up next month, would you buy that CD you have had your eye on now or later?

Change in Demand - Expectations about Future

Prices

• Likewise, if we hear that CD prices are going to drop next month, what do we do now?

Marginal Utility• Marginal Utility- the additional

usefulness or satisfaction a person gets from acquiring one more unit of a product.

• For example, let’s say you’ve just finished playing a game of basketball and you’re very thirsty.

Marginal Utility• How many of you would want a bottle

of PowerAde?

• The amount of PowerAde that you drink is the marginal utility of that bottle of PowerAde.

Marginal Utility• If after you drink that first bottle of

PowerAde, you’re still thirsty, you may choose to have another. The extra satisfaction you receive from the second bottle is the marginal utility of that bottle of PowerAde.

• Eventually, the marginal utility will be less than the price of the PowerAde and you’ll stop buying. This is known as diminishing marginal utility.

Marginal Utility

• Diminishing Marginal Utility- the more units of a certain product a person acquires, the less eager that person is to buy more of the product.

Elasticity of Demand• At its current price, how many of you

would buy a Nintendo Wii?

• Now, let’s say that we lower the price of the Wii to about $100, now how many of you would buy one?

Elasticity of Demand• The demand for the Wii is regarded as

elastic.– Elastic- a small change in price causes a

large change in quantity demanded

Elasticity of Demand• Now let’s look at salt. A higher or lower

price of salt probably won’t bring much change in the amount bought, because people can only consume so much salt.

• The demand of salt is regarded as inelastic.– Inelastic- a change in price causes a small

change in quantity demanded

Elasticity of Demand• Remember the candy bar example from

last class? Let’s say we’re in charge of setting the price for it. And at $0.25, it has a demand of 10.– That gives us a total revenue of $2.50

Elasticity of Demand• So, we want to make more $$$, so we

decide to raise the price to $0.50, in order to increase our revenue. Well, at $0.50 the demand for our candy bar is only 5.– So, unfortunately our revenue was

unchanged at $2.50; this means that our candy bar is unit elastic.

– Unit Elastic- total revenues remain the same when the price changes

Elasticity of DemandType of

ElasticityChange in

PriceChange in

Total Revenue

Elastic Decrease Increase

Inelastic Decrease Decrease

Unit Elastic Decrease No Change