{"id":5868,"date":"2016-07-19T18:00:44","date_gmt":"2016-07-19T18:00:44","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/macroeconomics\/?post_type=chapter&p=5868"},"modified":"2016-07-19T18:00:44","modified_gmt":"2016-07-19T18:00:44","slug":"reading-factors-affecting-demand","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/suny-hccc-macroeconomics\/chapter\/reading-factors-affecting-demand\/","title":{"raw":"Reading: Factors Affecting Demand","rendered":"Reading: Factors Affecting Demand"},"content":{"raw":"

\"15636059197_26b56acdd1_k\"<\/a><\/h2>\n

Introduction<\/h2>\nWe defined demand as the amount of some product that a consumer is willing<\/em> and able<\/em> to purchase at each price<\/em>. This suggests at least two factors, in addition to price, that affect demand. \"Willingness to purchase\" suggests a desire to buy, and it depends on what economists call tastes and preferences. If you neither need nor want something, you won't be willing to 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. The prices of related goods can also affect demand. If you need a new car, for example, 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.\n\nThese factors matter both for demand by an individual and demand by the market as a whole. Exactly how do these various factors affect demand, and how do we show the effects graphically? To answer those questions, we need the\u00a0ceteris paribus<\/em><\/span> assumption.\n

The Ceteris Paribus<\/em> Assumption<\/span><\/h2>\nA\u00a0demand curve<\/em> or a supply curve<\/em>\u00a0(which we'll cover later in this module) 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\u00a0ceteris paribus<\/em><\/strong>, a Latin phrase meaning \"other things being equal.\" Any given demand or supply curve is based on the ceteris paribus<\/em><\/span> assumption that all else is held equal. (You'll recall that economists use the\u00a0ceteris paribus<\/em><\/span> assumption to simplify the focus of analysis.) Therefore, a demand curve or a supply curve is a relationship between two, and only two, variables when all other variables are held equal<\/em>. If all else is not held equal, then the laws of supply and demand will not necessarily hold.\n\nCeteris paribus<\/span> <\/em>is typically applied when we look at how changes in price affect demand or supply, but\u00a0ceteris paribus<\/em><\/span> can also be applied more generally. In the real world, demand and supply depend on more factors than just price. For example, a consumer's demand depends on income, and a producer's supply depends on the cost of producing the product. How can we analyze the effect on demand or supply if multiple factors are changing at the same time\u2014say price rises and income falls? The answer is that we examine the changes one at a time, and assume that the other factors are held constant.\n\nFor example, we can say that an increase in the price reduces the amount consumers will buy (assuming income, and anything else that affects demand, is unchanged). Additionally, a decrease in income reduces the amount consumers can afford to buy (assuming price, and anything else that affects demand, is unchanged). This is what the\u00a0ceteris paribus<\/em><\/span> assumption really means. In this particular case, after we analyze each factor separately, we can combine the results. The amount consumers buy falls for two reasons: first because of the higher price and second because of the lower income.\n

The Effect of Income on Demand<\/span><\/h2>\nLet's use income as an example of how factors other than price affect demand. Figure 1 shows the initial demand for automobiles as D0<\/sub>. At point Q, for example, if the price is $20,000 per car, the quantity of cars demanded is 18 million. D0<\/sub> also shows how the quantity of cars demanded would change as a result of a higher or lower price. For example, if the price of a car rose to $22,000, the quantity demanded would decrease to 17 million, at point R.\n\n[caption id=\"\" align=\"aligncenter\" width=\"534\"]\"TheFigure 1. Shifts in Demand: A Car Example<\/strong>[\/caption]\n\nThe original demand curve D0<\/sub>, like every demand curve, is based on the\u00a0ceteris paribus<\/em><\/span> assumption that no other economically relevant factors change. Now imagine that the economy expands in a way that raises the incomes of many people, making cars more affordable. How will this affect demand? How can we show this graphically?\n\nReturn to Figure 1. The price of cars is still $20,000, but with higher incomes, the quantity demanded has now increased to 20 million cars, shown at point S. As a result of the higher income levels, the demand curve shifts to the right to the new demand curve D1<\/sub>, indicating an increase in demand. Table 1, below, shows clearly that this increased demand would occur at every price, not just the original one.\n
Table 1. Price and Demand Shifts: A Car Example<\/span><\/caption>\n
Price<\/th>\nDecrease to D2<\/sub><\/th>\nOriginal Quantity Demanded D0<\/sub><\/th>\nIncrease to D1<\/sub><\/th>\n<\/tr><\/thead>
$16,000<\/td>\n17.6 million<\/td>\n22.0 million<\/td>\n24.0 million<\/td>\n<\/tr>
$18,000<\/td>\n16.0 million<\/td>\n20.0 million<\/td>\n22.0 million<\/td>\n<\/tr>
$20,000<\/td>\n14.4 million<\/td>\n18.0 million<\/td>\n20.0 million<\/td>\n<\/tr>
$22,000<\/td>\n13.6 million<\/td>\n17.0 million<\/td>\n19.0 million<\/td>\n<\/tr>
$24,000<\/td>\n13.2 million<\/td>\n16.5 million<\/td>\n18.5 million<\/td>\n<\/tr>
$26,000<\/td>\n12.8 million<\/td>\n16.0 million<\/td>\n18.0 million<\/td>\n<\/tr><\/tbody><\/table>\nNow, imagine that the economy slows down so that many people lose their jobs or work fewer hours, reducing their incomes. In this case, the decrease in income would lead to a lower quantity of cars demanded at every given price, and the original demand curve D0<\/sub> would shift left to D2<\/sub>. The shift from D0<\/sub> to D2<\/sub> represents such a decrease in demand: At any given price level, the quantity demanded is now lower. In this example, a price of $20,000 means 18 million cars sold along the original demand curve, but only 14.4 million sold after demand fell.\n\nWhen 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:\u00a0Increased demand means that at every given price, the quantity demanded is higher, so that the demand curve shifts to the right from D0<\/sub> to D1<\/sub>. And, decreased demand means that at every given price, the quantity demanded is lower, so that the demand curve shifts to the left from D0<\/sub> to D2<\/sub>.\n\nWe just argued that higher income causes greater demand at every price. This is true for most goods and services. For some\u2014luxury cars, vacations in Europe, and fine jewelry\u2014the effect of a rise in income can be especially pronounced. A product whose demand rises when income rises, and vice versa, is called a normal good<\/strong>.\u00a0A few exceptions to this pattern do exist, however. 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<\/strong>.\u00a0In other words, when income increases, the demand curve shifts to the left.\n

Other Factors That Shift Demand Curves<\/span><\/h2>\nIncome 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.\n

Changing Tastes or Preferences<\/strong><\/span><\/h3>\n\"Photo<\/a>\n\nFrom 1980 to 2012, the per-person consumption of chicken by Americans rose from 33 pounds per year to 81 pounds per year, and consumption of beef fell from 77 pounds per year to 57 pounds per year, according to the U.S. Department of Agriculture (USDA). Changes like these are largely due to shifts\u00a0in taste, which change the quantity of a good demanded at every price: That is, they shift the demand curve for that good\u2014rightward for chicken and leftward for beef.\n

Changes in the Composition of the Population<\/strong><\/span><\/h3>\nThe proportion of elderly citizens in the United States population is rising. It rose from 9.8 percent in 1970 to 12.6 percent in 2000 and will be a projected (by the U.S. Census Bureau) 20 percent of the population by 2030. A society with relatively more children, like the United States in the 1960s, will have greater demand for goods and services like tricycles and day care 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.\n

Changes in the Prices of Related Goods<\/strong><\/span><\/h3>\nThe demand for a product can also be affected by changes in the prices of related goods such as substitutes or complements. A\u00a0substitute\u00a0<\/em><\/strong>is a good or service that can be used in place of another good or service. As electronic books, like this one, 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.\n\nOther goods are complements <\/b>for\u00a0each 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, since the quantity of golf clubs demanded falls (because of the law of demand), demand for a complement good like golf balls decreases, too. 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.\n

\"Photo<\/a><\/h3>\n

Changes in Expectations About Future Prices or Other Factors That Affect Demand<\/strong><\/span><\/h3>\nWhile 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\u00a0shift in demand<\/strong> happens\u00a0when a change in some economic factor (other than the current price) causes a different quantity to be demanded at every price.","rendered":"

\"15636059197_26b56acdd1_k\"<\/a><\/h2>\n

Introduction<\/h2>\n

We defined demand as the amount of some product that a consumer is willing<\/em> and able<\/em> to purchase at each price<\/em>. This suggests at least two factors, in addition to price, that affect demand. “Willingness to purchase” suggests a desire to buy, and it depends on what economists call tastes and preferences. If you neither need nor want something, you won’t be willing to 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. The prices of related goods can also affect demand. If you need a new car, for example, 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.<\/p>\n

These factors matter both for demand by an individual and demand by the market as a whole. Exactly how do these various factors affect demand, and how do we show the effects graphically? To answer those questions, we need the\u00a0ceteris paribus<\/em><\/span> assumption.<\/p>\n

The Ceteris Paribus<\/em> Assumption<\/span><\/h2>\n

A\u00a0demand curve<\/em> or a supply curve<\/em>\u00a0(which we’ll cover later in this module) 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\u00a0ceteris paribus<\/em><\/strong>, a Latin phrase meaning “other things being equal.” Any given demand or supply curve is based on the ceteris paribus<\/em><\/span> assumption that all else is held equal. (You’ll recall that economists use the\u00a0ceteris paribus<\/em><\/span> assumption to simplify the focus of analysis.) Therefore, a demand curve or a supply curve is a relationship between two, and only two, variables when all other variables are held equal<\/em>. If all else is not held equal, then the laws of supply and demand will not necessarily hold.<\/p>\n

Ceteris paribus<\/span> <\/em>is typically applied when we look at how changes in price affect demand or supply, but\u00a0ceteris paribus<\/em><\/span> can also be applied more generally. In the real world, demand and supply depend on more factors than just price. For example, a consumer’s demand depends on income, and a producer’s supply depends on the cost of producing the product. How can we analyze the effect on demand or supply if multiple factors are changing at the same time\u2014say price rises and income falls? The answer is that we examine the changes one at a time, and assume that the other factors are held constant.<\/p>\n

For example, we can say that an increase in the price reduces the amount consumers will buy (assuming income, and anything else that affects demand, is unchanged). Additionally, a decrease in income reduces the amount consumers can afford to buy (assuming price, and anything else that affects demand, is unchanged). This is what the\u00a0ceteris paribus<\/em><\/span> assumption really means. In this particular case, after we analyze each factor separately, we can combine the results. The amount consumers buy falls for two reasons: first because of the higher price and second because of the lower income.<\/p>\n

The Effect of Income on Demand<\/span><\/h2>\n

Let’s use income as an example of how factors other than price affect demand. Figure 1 shows the initial demand for automobiles as D0<\/sub>. At point Q, for example, if the price is $20,000 per car, the quantity of cars demanded is 18 million. D0<\/sub> also shows how the quantity of cars demanded would change as a result of a higher or lower price. For example, if the price of a car rose to $22,000, the quantity demanded would decrease to 17 million, at point R.<\/p>\n

\"The<\/p>\n

Figure 1. Shifts in Demand: A Car Example<\/strong><\/p>\n<\/div>\n

The original demand curve D0<\/sub>, like every demand curve, is based on the\u00a0ceteris paribus<\/em><\/span> assumption that no other economically relevant factors change. Now imagine that the economy expands in a way that raises the incomes of many people, making cars more affordable. How will this affect demand? How can we show this graphically?<\/p>\n

Return to Figure 1. The price of cars is still $20,000, but with higher incomes, the quantity demanded has now increased to 20 million cars, shown at point S. As a result of the higher income levels, the demand curve shifts to the right to the new demand curve D1<\/sub>, indicating an increase in demand. Table 1, below, shows clearly that this increased demand would occur at every price, not just the original one.<\/p>\n\n\n\n\n\n\n\n\n\n\n
Table 1. Price and Demand Shifts: A Car Example<\/span><\/caption>\n
Price<\/th>\nDecrease to D2<\/sub><\/th>\nOriginal Quantity Demanded D0<\/sub><\/th>\nIncrease to D1<\/sub><\/th>\n<\/tr>\n<\/thead>\n
$16,000<\/td>\n17.6 million<\/td>\n22.0 million<\/td>\n24.0 million<\/td>\n<\/tr>\n
$18,000<\/td>\n16.0 million<\/td>\n20.0 million<\/td>\n22.0 million<\/td>\n<\/tr>\n
$20,000<\/td>\n14.4 million<\/td>\n18.0 million<\/td>\n20.0 million<\/td>\n<\/tr>\n
$22,000<\/td>\n13.6 million<\/td>\n17.0 million<\/td>\n19.0 million<\/td>\n<\/tr>\n
$24,000<\/td>\n13.2 million<\/td>\n16.5 million<\/td>\n18.5 million<\/td>\n<\/tr>\n
$26,000<\/td>\n12.8 million<\/td>\n16.0 million<\/td>\n18.0 million<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Now, imagine that the economy slows down so that many people lose their jobs or work fewer hours, reducing their incomes. In this case, the decrease in income would lead to a lower quantity of cars demanded at every given price, and the original demand curve D0<\/sub> would shift left to D2<\/sub>. The shift from D0<\/sub> to D2<\/sub> represents such a decrease in demand: At any given price level, the quantity demanded is now lower. In this example, a price of $20,000 means 18 million cars sold along the original demand curve, but only 14.4 million sold after demand fell.<\/p>\n

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:\u00a0Increased demand means that at every given price, the quantity demanded is higher, so that the demand curve shifts to the right from D0<\/sub> to D1<\/sub>. And, decreased demand means that at every given price, the quantity demanded is lower, so that the demand curve shifts to the left from D0<\/sub> to D2<\/sub>.<\/p>\n

We just argued that higher income causes greater demand at every price. This is true for most goods and services. For some\u2014luxury cars, vacations in Europe, and fine jewelry\u2014the effect of a rise in income can be especially pronounced. A product whose demand rises when income rises, and vice versa, is called a normal good<\/strong>.\u00a0A few exceptions to this pattern do exist, however. 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<\/strong>.\u00a0In other words, when income increases, the demand curve shifts to the left.<\/p>\n

Other Factors That Shift Demand Curves<\/span><\/h2>\n

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.<\/p>\n

Changing Tastes or Preferences<\/strong><\/span><\/h3>\n

\"Photo<\/a><\/p>\n

From 1980 to 2012, the per-person consumption of chicken by Americans rose from 33 pounds per year to 81 pounds per year, and consumption of beef fell from 77 pounds per year to 57 pounds per year, according to the U.S. Department of Agriculture (USDA). Changes like these are largely due to shifts\u00a0in taste, which change the quantity of a good demanded at every price: That is, they shift the demand curve for that good\u2014rightward for chicken and leftward for beef.<\/p>\n

Changes in the Composition of the Population<\/strong><\/span><\/h3>\n

The proportion of elderly citizens in the United States population is rising. It rose from 9.8 percent in 1970 to 12.6 percent in 2000 and will be a projected (by the U.S. Census Bureau) 20 percent of the population by 2030. A society with relatively more children, like the United States in the 1960s, will have greater demand for goods and services like tricycles and day care 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.<\/p>\n

Changes in the Prices of Related Goods<\/strong><\/span><\/h3>\n

The demand for a product can also be affected by changes in the prices of related goods such as substitutes or complements. A\u00a0substitute\u00a0<\/em><\/strong>is a good or service that can be used in place of another good or service. As electronic books, like this one, 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.<\/p>\n

Other goods are complements <\/b>for\u00a0each 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, since the quantity of golf clubs demanded falls (because of the law of demand), demand for a complement good like golf balls decreases, too. 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.<\/p>\n

\"Photo<\/a><\/h3>\n

Changes in Expectations About Future Prices or Other Factors That Affect Demand<\/strong><\/span><\/h3>\n

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\u00a0shift in demand<\/strong> happens\u00a0when a change in some economic factor (other than the current price) causes a different quantity to be demanded at every price.<\/p>\n\n\t\t\t

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Candela Citations<\/h3>\n\t\t\t\t\t
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CC licensed content, Original<\/div>