A demand curve isolates the relation between the price of a good and quantity demanded when other factors that could affect demand remain unchanged. What are those other factors? Variables that can affect market demand are (1) the money income of consumers, (2) the prices of other goods, (3) consumer expectations, (4) the number or composition of consumers in the market, and (5) consumer tastes. How could changes in each affect demand?
Changes in Consumer Income
Exhibit 2 shows the market demand curve D for pizza. This demand curve assumes a given money income. Suppose consumer income increases. Some consumers are then willing and able to buy more pizza at each price, so market demand increases. The demand curve shifts to the right from D to D9. For example, at a price of $12, the amount of pizza demanded increases from 14 million to 20 million per week, as indicated by the movement from point b on demand curve D to point f on demand curve D9. In short, an increase in demand that is, a rightward shift of the demand curve means that consumers are willing and able to buy more pizza at each price. Goods are classified into two broad categories, depending on how consumers respond to changes in money income. The demand for a normal good increases as money income increases. Because pizza is a normal good, its demand curve shifts rightward when money income increases. Most goods are normal. In contrast, demand for an inferior good actually decreases as money income increases, so the demand curve shifts leftward. Examples of inferior goods include bologna sandwiches, used furniture,
Exhibit 2 shows the market demand curve D for pizza. This demand curve assumes a given money income. Suppose consumer income increases. Some consumers are then willing and able to buy more pizza at each price, so market demand increases. The demand curve shifts to the right from D to D9. For example, at a price of $12, the amount of pizza demanded increases from 14 million to 20 million per week, as indicated by the movement from point b on demand curve D to point f on demand curve D9. In short, an increase in demand that is, a rightward shift of the demand curve means that consumers are willing and able to buy more pizza at each price. Goods are classified into two broad categories, depending on how consumers respond to changes in money income. The demand for a normal good increases as money income increases. Because pizza is a normal good, its demand curve shifts rightward when money income increases. Most goods are normal. In contrast, demand for an inferior good actually decreases as money income increases, so the demand curve shifts leftward. Examples of inferior goods include bologna sandwiches, used furniture,
and used clothes. As money income increases, consumers tend to switch from these inferior goods to normal goods (such as roast beef sandwiches, new furniture, and new clothes).
Changes in the Prices of Other Goods
Again, the prices of other goods are assumed to remain constant along a given demand curve. Now let’s bring these other prices into play. Consumers have various ways of trying to satisfy any particular want. Consumers choose among substitutes based on relative prices. For example, pizza and tacos are substitutes, though not perfect ones. An increase in the price of tacos, other things constant, reduces the quantity of tacos demanded along a given taco demand curve. An increase in the price of tacos also increases the demand for pizza, shifting the demand curve for pizza to the right. Two goods are considered substitutes if an increase in the price of one shifts the demand for the other rightward.
Goods used in combination are called complements. Examples include Pepsi and pizza, milk and cookies, computer software and hardware, and airline tickets and rental cars. Two goods are considered complements if an increase in the price of one decreases the demand for the other, shifting that demand curve leftward. For example, an increase in the price of Pepsi shifts the demand curve for pizza leftward. But most pairs of goods selected at random are unrelated—for example, pizza and housing, or milk and gasoline. Still, an increase in the price of an unrelated good reduces the consumers’ real income and can thereby reduce the demand for pizza and other goods.
Again, the prices of other goods are assumed to remain constant along a given demand curve. Now let’s bring these other prices into play. Consumers have various ways of trying to satisfy any particular want. Consumers choose among substitutes based on relative prices. For example, pizza and tacos are substitutes, though not perfect ones. An increase in the price of tacos, other things constant, reduces the quantity of tacos demanded along a given taco demand curve. An increase in the price of tacos also increases the demand for pizza, shifting the demand curve for pizza to the right. Two goods are considered substitutes if an increase in the price of one shifts the demand for the other rightward.
Goods used in combination are called complements. Examples include Pepsi and pizza, milk and cookies, computer software and hardware, and airline tickets and rental cars. Two goods are considered complements if an increase in the price of one decreases the demand for the other, shifting that demand curve leftward. For example, an increase in the price of Pepsi shifts the demand curve for pizza leftward. But most pairs of goods selected at random are unrelated—for example, pizza and housing, or milk and gasoline. Still, an increase in the price of an unrelated good reduces the consumers’ real income and can thereby reduce the demand for pizza and other goods.
Changes in Consumer Expectations
Another factor assumed constant along a given demand curve is consumer expectations about factors that influence demand, such as incomes or prices. A change in consumers’ income expectations can shift the demand curve. For example, a consumer who learns about a pay raise might increase demand well before the raise takes effect. A college senior who lands that first real job may buy a new car even before graduation. Likewise, a change in consumers’ price expectations can shift the demand curve. For example, if you expect the price of pizza to jump next week, you may buy an extra one today for the freezer, shifting this week’s demand for pizza rightward. Or if consumers come to believe that home prices will climb next year, some will increase their demand for housing now, shifting this year’s demand for housing rightward. The expectation of lower prices has the opposite effect. For example, during the recession of 2007–2009, people expected home prices to continue falling, so they put off buying homes, shifting the demand for housing leftward. Such expectations can often be self-fulfilling.
Another factor assumed constant along a given demand curve is consumer expectations about factors that influence demand, such as incomes or prices. A change in consumers’ income expectations can shift the demand curve. For example, a consumer who learns about a pay raise might increase demand well before the raise takes effect. A college senior who lands that first real job may buy a new car even before graduation. Likewise, a change in consumers’ price expectations can shift the demand curve. For example, if you expect the price of pizza to jump next week, you may buy an extra one today for the freezer, shifting this week’s demand for pizza rightward. Or if consumers come to believe that home prices will climb next year, some will increase their demand for housing now, shifting this year’s demand for housing rightward. The expectation of lower prices has the opposite effect. For example, during the recession of 2007–2009, people expected home prices to continue falling, so they put off buying homes, shifting the demand for housing leftward. Such expectations can often be self-fulfilling.
Changes in the Number or Composition of Consumers
As mentioned earlier, the market demand curve is the sum of the individual demand curves of all consumers in the market. If the number of consumers changes, the demand curve will shift. For example, if the population grows, the demand curve for pizza will shift rightward. Even if total population remains unchanged, demand could shift with a change in the composition of the population. For example, an increase over time in teenagers as a share of the population could shift pizza demand rightward. A baby boom would shift rightward the demand for car seats and baby food. A growing Latino population would affect the demand for Latino foods.
As mentioned earlier, the market demand curve is the sum of the individual demand curves of all consumers in the market. If the number of consumers changes, the demand curve will shift. For example, if the population grows, the demand curve for pizza will shift rightward. Even if total population remains unchanged, demand could shift with a change in the composition of the population. For example, an increase over time in teenagers as a share of the population could shift pizza demand rightward. A baby boom would shift rightward the demand for car seats and baby food. A growing Latino population would affect the demand for Latino foods.
Changes in Consumer Tastes
Do you like anchovies on your pizza? How about sauerkraut on your hot dogs? Are you into tattoos and body piercings? Is music to your ears more likely to be rock, country, hip-hop, reggae, R&B, jazz, funk, Latin, gospel, new age, or classical? Choices in food, body art, music, sports, clothing, books, movies, TV shows indeed, all consumer choices are influenced by consumer tastes. Tastes are nothing more than your likes and dislikes as a consumer. What determines tastes? Your desires for food when hungry and drink when thirsty are largely biological. So too is your desire for comfort, rest, shelter, friendship, love, status, personal safety, and a pleasant environment. Your family background affects some of your tastes your taste in food, for example, has been shaped by years of home cooking. Other influences include the surrounding culture, peer pressure, and religious convictions. So economists can say a little about the origin of tastes, but they claim no special expertise in understanding how tastes develop and change over time. Economists recognize, however, that tastes have an important impact on demand. For example, although pizza is popular, some people just don’t like it and those who are lactose intolerant can’t stomach the cheese topping. Thus, most people like pizza but some don’t.
Do you like anchovies on your pizza? How about sauerkraut on your hot dogs? Are you into tattoos and body piercings? Is music to your ears more likely to be rock, country, hip-hop, reggae, R&B, jazz, funk, Latin, gospel, new age, or classical? Choices in food, body art, music, sports, clothing, books, movies, TV shows indeed, all consumer choices are influenced by consumer tastes. Tastes are nothing more than your likes and dislikes as a consumer. What determines tastes? Your desires for food when hungry and drink when thirsty are largely biological. So too is your desire for comfort, rest, shelter, friendship, love, status, personal safety, and a pleasant environment. Your family background affects some of your tastes your taste in food, for example, has been shaped by years of home cooking. Other influences include the surrounding culture, peer pressure, and religious convictions. So economists can say a little about the origin of tastes, but they claim no special expertise in understanding how tastes develop and change over time. Economists recognize, however, that tastes have an important impact on demand. For example, although pizza is popular, some people just don’t like it and those who are lactose intolerant can’t stomach the cheese topping. Thus, most people like pizza but some don’t.
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