Factors Affecting DemandChapter 4, Section 2

Changing Demand

There are a lot of reasons why demand for an item increases or decreases…

Price is one easy way to affect demand, but there are others…

In the case of a fad, it might be that consumer tastes are changing

In the case of homes, it might be the closing of a big factory in a town, or the opening of a new hospital

How/why does price impact demand?

• Two main reasons:

• Income effect – the change in the amount that consumers will buy because the purchasing power of their income changes.

• Substitution effect – a change in the amount that consumers will buy because they buy substitute goods instead.

•These cause a…

Change in Quantity Demanded

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1 2 3 4 5 6 7Quantity Demanded of DVDsA change in quantity demanded is an increase or

decrease in the amount demanded because of a change in price.

6 Factors that Affect Demand• 1. Income – Increases in income increase demand for most goods, while decreases in income decrease demand for most goods.• Goods that follow this pattern are considered normal goods.

• Good that consumers demand less of as their incomes rise are considered inferior goods.

6 Factors that Affect Demand• 2. Market Size – If the number of consumers increases, so will demand. If the number of consumers decreases, so will demand.

6 Factors that Affect Demand• 3. Consumer Tastes – If a good becomes more popular, demand will rise. If a good loses popularity, demand will fall.

6 Factors that Affect Demand• 4. Consumer Expectations – If you think the price of a good may change, that expectation can determine whether you buy now or wait until later.

6 Factors that Affect Demand• 5. Substitute goods – •Goods and services that can be used in place of one another are called substitutes.• If the price of a substitute drops, more people will choose to buy it instead of the original item. Demand for the substitute will increase as demand for the original item decreases. • If the price of the substitute rises, more people will choose to buy the original item and demand for it will increase.

6 Factors that Affect Demand• 5. Substitute goods –

6 Factors that Affect Demand• 6. Complementary goods –• Goods and services that are used together, so a rise in demand for one increases the demand for the other.

Change in Demand (ex. Peters loses his job.)

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1 2 3 4 5 6 7Quantity Demanded of DVDsA change in demand occurs when something prompts

consumers to buy different amounts at every price.

Change in Demand (ex. Peters gets a promotion.)

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1 2 3 4 5 6 7Quantity Demanded of DVDsA change in demand occurs when something prompts

consumers to buy different amounts at every price.

Change in Demand or Quantity Demanded?

Change in Demand:

Change in 1 of the 6 factors that affect demand

A SHIFT of the entire curve to the - - Left – decrease in

demand Right – increase in

demand

Change in Quantity Demanded:

Change in price

Movement ALONG the demand curve