Changing Other Demand Variables

Changing Other Demand Variables

Review: A change in quantity demanded is movement along the demand curve caused by a change in the price of the good.

Review: A change in demand is a shift in a demand curve caused by changing a variable other than price.

Substitute goods are goods that can be purchased instead of the original good because they satisfy the same needs.

Complementary goods are goods that are closely related to the original and used with the original goods.

A normal good is a good characterized by rising consumption when a consumer's income rises.

An inferior good is a good characterized by falling consumption falls when a consumer's income rises.

Recall from previous lectures that when the price of the good itself changes, you have a change in quantity demanded; this change is represented by movement along a demand curve. At higher prices a consumer will purchase less bread than at lower prices. All other factors that influence demand are held constant.

Substitute goods are a goods that are similar to the original and that a consumer may purchase in place of the original goods.

If the price of a substitute good increases, the consumer would demand more of the original product. In this example, if the price of bagels increases, the consumer would demand more bread. If the price of bagels falls, the consumer would demand less bread and more bagels at every price. Note: This change is a change in demand; the demand curve shifts.

Complementary goods are closely related to the original goods and often are purchased with the original. In this case, cheese is the complementary good with bread.

If the price of cheese falls, the demand for bread will increase because consumers will want more cheese sandwiches. The result is a change in demand (a shift in the demand curve).

Think about what will happen to the demand for bread if the price of cheese increases.

A normal good is one whose consumption increases when income increases. The demand curve for a normal good shifts out when a consumer's income increases as shown on the left. It shifts inward when a consumer's income decreases.

An inferior good is one whose consumption decreases when income increases and rises when income falls. The demand curve for an inferior good shifts out when income decreases and shifts in when income increases.

The example on the left shows a change in demand for an inferior good (such as beans) when the consumer experiences an income reduction.

Expectations about future prices will cause a consumer's demand to change in the present. If the consumer expects the price of bread to fall in the future, she will demand less bread now at every price, waiting for the future to stock up on bread. As shown on the left, the consumer's demand curve shifts inward.

If there is a major drought in the Midwest, she may expect future bread prices to be very high. In this case, she may stock up on bread now, and her demand curve will shift out.

To summarize: When you change any of the factors that influence demand, except price, you will cause a change in demand. The demand curve will shift in or out depending on the direction of the change in the factor.

A change in price means that there is a change in quantity demanded. This change is movement along the demand curve, as shown on the left and in the first graph on these notes.

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