Law of Demand: Influential Factors

Changes in Demand

LAW OF DEMAND: INFLUENTIAL FACTORS

Imagine that each time you go to the movies, you buy the same snack. You know its price, and you always bring enough money to cover the ticket and the snack. But one evening, when you reach the front of the line, you find out that the cost of the snack has gone up! What do you do? Should you buy the snack anyway? Do you even have enough money to buy it now? Should you buy something else instead? In the real world, the prices of commonly used goods and services change. These changes affect the quantity of goods and services that consumers (like you) buy.

In the second part of the lesson on demand, you will learn about factors that influence the demand for goods and services. You will also learn how to depict these changes on a graph. OBJECTIVES

▪ Explore factors that influence the demand for goods and services. ▪ Illustrate the effects of these influences on the demand curve. VOCABULARY

complements goods that go together

demand willing and able to consume

income money earned

relative prices of a good or service compared to the prices of another product prices

substitutes goods or services that can replace other goods or services

Question #1Matching

Match these items. Match the items in the left column to the items in the right column.

Changes in Demand

1. complements money earned

2. demand goods that go together

prices of a good or service compared to the prices of 3. income another product

relative 4. willing and able to consume prices

goods or services that can replace other goods or 5. substitutes services

Suppose you go to the snack shop down the street about three times a week. You hang out there with your friends after school and grab a bite to eat. Because your lunch period is 10:30 in the morning, you are hungry by the time school ends. So, you usually buy an egg sandwich at the snack shop for $2.00. One day, though, you order the sandwich, and when it comes time to pay, the cashier tells you that the price has changed to $4.00. You hand over the money and take your sandwich. But you have lost your appetite. How can you afford to pay double the money for a sandwich? Now, instead of spending $6.00 on food each week, you will be spending $12.00. You like the egg sandwiches, but you can no longer afford them.

Changes in Demand

Often, changes in price (especially big increases) can change the goods and services that you demand. You may demand less of them, such as by only buying one or two egg sandwiches a week, rather than three. Or you may not demand any at all and no longer eat out after school. You may also choose to do something else—substitute. You probably have had at least one substitute schoolteacher. It is a person who takes the place of your regular teacher. It's the same idea with a substitute good or service. The substitute can replace another good or service. For example, margarine and butter are substitutes, because a person can use one good as a replacement for the other.

For you, the five-cheese sandwich was a substitute for the egg sandwich. Now suppose that many consumers believe that these two products are substitutes. How does this affect the demand for egg and five-cheese sandwiches? The price increase in the egg sandwich makes the quantity demanded of egg sandwiches decrease. Remember that if the price of a good increases, people will most likely buy less of the good. It also makes the demand for the five-cheese sandwich (its substitute) increase. Take a look:

Price of Egg Sandwich Goes Up Quantity Demanded of Egg Sandwiches Decreases

More People Substitute Five-Cheese Sandwiches

Demand for Five-Cheese Sandwiches Increases

Or in more general terms,

Price of a Product Increases Demand for its Substitute Increases

This Might Help Relative Prices and Substitution Substituting a good or service for another product involves more than the price of the good or service. It is also about the relative prices of goods and services. Relative prices involve comparing the prices of products. Look back to the snack shop's menu. Compared to the old price of $2.00 for your egg sandwich, the vegetable and turkey sandwiches are more than double the price! So, relative to your egg sandwich, these other sandwiches cost a lot. But changing the price of an egg sandwich to $4.00 can affect relative prices and the buying decisions of consumers. It actually makes the vegetable and turkey sandwiches relatively less expensive than before.

Question #2MultipleChoice

Changes in Demand

At the grocery store, you learn that the price of butter has increased by a lot. Many people respond by buying margarine. This makes the demand for butter _____ and the demand for margarine _____.

decrease, increase

increase, decrease

stay the same, stay the same

DEMAND AND COMPLEMENTS

Did you know that substitutes are just one kind of relationship between goods and services? Economists also study the effects of price changes on the demand for goods that are complements. These are goods that go together, such as ice cream and ice cream cones, or television sets and cable TV service. A rise in the price of a good or service also affects its complement. Think about it: If the price of ice cream increases, then people will demand less ice cream. And if they demand less ice cream, then they will also demand fewer ice cream cones. After all, most people buy ice cream cones to put the ice cream in. So an increase in the price of a good or service decreases the demand for its complements. Or,

Price of a Product Increases Demand for its Complements Decreases

Changes in Demand

Demand and Income There are other factors, besides the price of a product (or the price of its substitute or complement) that affect demand. One factor is income. Income, or money earned, affects how able a person is to demand a good or service. Think about expensive shoes or a laptop or designer jeans. You'd like them all, but you can't afford them. What would happen if your income increased? What if you received a raise at work, or many people gave you cash gifts for your birthday? Then your demand for these products might change.

For normal goods, an increase in income means an increase in the demand for the goods. For example, electronic items—such as television sets, computers, music players, and video games—are normal goods. As people's incomes increase, they buy more of these goods. There are also goods called "inferior goods." The demand for inferior goods actually decreases as people's incomes increase. One example of an inferior good is bus transportation. As people earn more money, their demand for bus travel decreases. Instead, a person may choose to take a cab or buy a car.

Demand and Population

Population is another factor that affects demand. Demand is about the consumers who are willing and able to buy goods and services. If you have more people, you will also have more demand for goods and services.

Populations of towns, cities, states, and countries change. People move to new places for different reasons, including new jobs and being closer to family. Populations also decrease due to people relocating to find work or to natural disasters, wars, or disease epidemics. These changes in population affect demand.

Consider that the population in New Orleans, Louisiana, decreased by 54 percent between 2000 and 2006. How did this decrease affect the demand for clothes in New Orleans? How can you illustrate the change in demand using a demand curve?

Take a look:

Changes in Demand

The graph above shows the effect of a population decrease on the demand for clothing. In the case of a population decrease, the demand for clothing decreases. So, the demand curve moves to the left. This means that at any given price, there is less demand for clothing.

Tastes, Climate, and Demand

Two other factors that influence demand are tastes and climate. You already know that preferences influence a consumer's decisions. If you are deciding between two products that are about the same price, your preference will decide which product you will choose. In other words, you will choose the product that best suits your taste. For example, suppose you have a choice between two cell phones that are about the same in price and features. You may choose one cell phone over another because you like the color or the brand or even because your best friend has one! But however you make your decision, your preference plays a role in your demand for the cell phone.

Climate also plays a role in the demand for goods and services. Chances are the demand for swimsuits is greater in Southern Florida than in Alaska. But the demand for snow gear is greater in Alaska than in Southern Florida. Likewise, rainy areas (such as Seattle) might have a greater demand for umbrellas. Weather conditions can affect the demand for certain products.

Changes in Demand

Question #3MultipleChoice

The grocery store wants to increase the demand for ice cream cones, so it puts ice cream on sale. This shows that the grocery store owner thinks that ice cream and ice cream cones are _____.

complements

substitutes

unrelated

Question #4MultipleChoice

You just received a raise at work and consider meat a normal good. This means that your demand for meat will _____.

stay the same

decrease

increase

LET'S REVIEW!

Changes in Demand

In this lesson, you've explored the factors that influence the demand for goods and services, such as a price change in a good's substitute:

• If the price of gloves increases, then the demand for mittens increases.

Or a price change in a good's complement:

• If the price of tennis rackets increase, then the demand for tennis balls decreases.

Or a change in income:

• If income increases, the demand for cars increases (normal good). • If income increases, the demand for bus travel decreases (inferior good).

You also learned about other factors, such as tastes, population, and climate, that affect the demand for goods and services. Finally, you took a look at how shifts in the demand curve look on a graph. In this question set, you'll be asked to answer questions on these topics.