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Shifts of the Demand Curve

Shifts of the Demand Curve. The Law of Demand. Demand- the desire to own something AND the ability to pay for it. The Law of Demand. AND…. As price goes down, you demand more of something!. DEMAND GOES DOWN. PRICE GOES UP. Substitution and Income Effect.

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Shifts of the Demand Curve

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  1. Shifts of the Demand Curve

  2. The Law of Demand • Demand- the desire to own something AND the ability to pay for it. • The Law of Demand AND…. As price goes down, you demand more of something! DEMAND GOES DOWN PRICE GOES UP

  3. Substitution and Income Effect • Substitution Effect- When the price of one good rises, you demand less of that good, and demand more of another good. • Income Effect- If you buy fewer of one good without buying other goods because of rising prices. • Demand Schedule- table that lists the quantity of a good that a person will purchase at each price.

  4. Demand • A demand curve is accurate only as long as there are not changes other than price that could affect the consumer’s decision. • A store owner would choose what price and quantity combination from the list that would maximize profits, and produce that amount of goods. • Hold everything else constant.

  5. Price Change in quantity demanded caused by a change in price is shown as a movement along a demand curve CHANGE IN QUANTITY DEMANDED 0 .5 1 1.5 2 2.5 3 0 1 2 3 4 5 Quantity

  6. When we allow other factors to change, we no longer move along the demand curve, the ENTIRE demand curve shifts. Price CHANGE IN DEMAND 0 .5 1 1.5 2 2.5 3 Original Demand New Demand 0 1 2 3 4 5 Quantity

  7. WHAT CAUSES A SHIFT? • A change in the price of a good does not cause the demand curve to shift. • Income • Consumer Expectations • Consumer Tastes and Advertising • Population

  8. Income • A consumers income affects his or her demand for most goods. • Most items that are purchased are normal goods- goods that consumers demand more of when their incomes increase. • Income increase from $50 to $75, buy more normal goods at every price level • Other goods are called inferior goods (A good that consumers demand less of when their incomes increase) • Generic cereal, used cars, used paperback books.

  9. Population • Changes in the size of the population will also affect the demand for most products. • A rise in population will increase the demand for houses, food, and many other goods and services. • Over the next few decades, the market will face rising demand for the goods and services that are desired for senior citizens • Medical care, recreational vehicles…

  10. Consumer Expectations • Our expectations about the future can affect our demand for certain goods today. • The current demand for a good is positively related to its expected future price. • If you expect the price of a TV to rise, your current demand will rise, which means you will buy the good sooner. • If you expect the price to drop, your current demand will fall and you will wait for the lower price.

  11. Consumer tastes and advertising • Certain Fads • Clever advertising campaigns, social trends, the influence of TV shows… or combined. • CHANGES IN TASTES AND PREFERENCES • Hope to increase the demand for their product—increasing money spent on advertising.

  12. Prices of Related goods • The demand curve for one good can be affected by a change in the demand for another good. • Compliments- two goods that are bought and used together • Skis and ski boots • Substitutes- goods used in place of one another. • Skis and snowboards

  13. When the price of skis go up, the demand for ski boots fall. (demand shifts left) • When the price of skis go down, the demand for ski boots rise. (demand shifts right) • When the price of skis go up, the demand for snowboards go up. (demand shifts right) • When the price of skis go down, the demand for snowboards go down. (demand shifts left)

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