ECONOMICS TOPIC 3 LESSON 2

ECONOMICS TOPIC 3 LESSON 2

Shifts in Demand

Esential question

How do we affect the economy?

Changes in Demand

Sometimes increases or decreases in demand are not connected to price. On a stormy night, the Burger Barn may be nearly empty while the phone is ringing off the hook at the Pizza Palace with orders for delivery.

ceteris paribus

When we counted the number of pizza slices that would sell as the price went up or down, we assumed that nothing besides the price of pizza would change. Economists refer to this assumption as ceteris paribus, the Latin phrase for “all other things held constant.” The demand schedule took into account only changes in price. It did not consider the effects of news reports or any one of thousands of other factors that change from day to day.

ceteris paribus

A demand curve is accurate only as long as there are no changes other than price that could affect the consumer’s decision. In other words, a demand curve is accurate only as long as the ceteris paribus assumption is true.

Demand Shifts

When we drop the ceteris paribus rule and allow other factors to change, we no longer move along the demand curve. Instead, the entire demand curve shifts. A shift in the demand curve means that at every price, consumers buy a different quantity than before. This shift of the entire curve is what economists refer to as a change in demand.

Open Ended

The dark blue arrow shows how price affects quantity demanded. The purple lines show actual shifts in demand. Analyze Graphs Which type of demand shift would lead to higher prices?

Multiple Choice

Check Understanding What happens to demand when we drop the ceteris paribus rule?

• Demand always increases.

• Demand always decreases.

• The entire demand curve can shift.

• The demand curve becomes straight.

The Non-Price Determinants of Demand

However, several factors can cause demand for a good to change. These are called non-price determinants. They are factors that can lead to the shifting of demand up or down. Non-price determinants include income, consumer expectations, population, demographics, and consumer tastes and advertising.

Changes in Income

A consumer’s income affects his or her demand for most goods. Most items that we purchase are normal goods, goods that consumers demand more of when their incomes increase.

There are also other goods called inferior goods. They are called inferior goods because an increase in income causes demand for these goods to fall. Inferior goods are goods that you would buy in smaller quantities, or not at all, if your income were to rise and you could afford something better.

Consumer Expectations

Our expectations about the future can affect our demand for certain goods today. Suppose that you have had your eye on a new bicycle for several months. One day you walk into the store to look at the bike, and the salesperson mentions that the store will be raising the price in one week. Now that you expect a higher price in the near future, you are more likely to buy the bike today. In other words, the expectation of a higher price in the future has caused your immediate demand to increase.

Changes in Demographics

Demographics are the statistical characteristics of populations, such as age, race, gender, occupation, and income level. Businesses use this data to identify who potential customers are, where they live, and how likely they are to purchase a specific product. Demographics also have a strong influence on the packaging, pricing, and advertising for a product.

Open Ended

Hispanic Americans are a growing demographic force in the U.S. Analyze Information How would you expect demand for goods intended to appeal to Hispanic Americans to change in the future?

Changes in Population Size

Changes in the size of the population will also affect the demand for most products. For example, a growing population needs to be housed and fed. Therefore, a rise in population will increase demand for houses, food, and many other goods and services.

Consumer Tastes and Advertising

Changes in tastes and preferences cannot be explained by changes in income or population or worries about future price increases. Advertising is a factor that shifts demand curves because it plays an important role in many trends. Meanwhile, new media and new technology have led to new trends in advertising.

Open Ended

The influence of social media has exploded in the 2000s. Analyze Data What evidence can you find that advertisers expect the influence of social media to continue growing?

Prices of Related Goods

The demand curve for one good can also shift in response to a change in the demand for another good. There are two types of related goods that interact this way: complements and substitutes.

Complements are two goods that are bought and used together.

Substitutes are goods that are used in place of one another.

Multiple Choice

Define Which answer best describes a normal good?

• a good whose demand is unaffected by changes in price

• a good whose price is unaffected by changes in demand

• a good consumers demand less of as their incomes increase

• a good consumers demand more of as their incomes increase

Open Ended

How do we affect the economy?