The Demand Curve Shifts

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[Tyler] In our previous videos,

we covered the basics
of the demand curve.

Now we get to dive into
what happens

when the demand curve shifts

due to increases or decreases
in market demand.

Remember that a demand curve
is a function

which shows the quantity demanded
at different prices.

And the quantity demanded
is the quantity

that buyers are willing
and able to purchase

at a particular price.

We said last time
that an increase in demand

means a shifting out
of the demand curve,

a movement toward the northeast
away from the origin.

Now let's look at that more closely.

An increase in demand means
there's a greater quantity demanded

at every price.

For example,

on the old demand curve
at a price of $25,

people were willing
and able to purchase 70 units.

On the new demand curve
at that same price of $25,

people are now willing
and able to purchase 80 units.

An increase in demand
is a greater quantity demanded

at the same price.

We can also read
an increase in demand

using the vertical method.

What that means is that
in every quantity

there is a greater willingness
to pay for that quantity.

For example, for the 70th unit,

people were willing to pay $25
for that unit.

Now with the new demand curve,

people are willing to pay $50
for that unit.

That's a greater willingness to pay
for the same quantity

and this is what
an increase in demand means.

To review
because this is important:

an increase in demand
means an increase

in the quantity demanded
at every price,

or equivalently, it means
an increase

in the maximum willingness to pay
for a given quantity.

What would cause an increase
in demand?

The answer is anything that increases
the quantity demanded

at a given price

or that which increases
the maximum willingness to pay

for a given quantity.

For instance, can you think
of some factors

which would make consumers
willing to pay more for a good?

Can you think of a factor
which would make consumers want

a greater quantity at a fixed price?

Those are the types of factors

which are going to shift
the demand curve.

Now in a minute
I'm going to give you a list

of such possible factors

but I don't want you to memorize
this list.

Instead, I want you to understand
what an increase in demand means.

If you understand that,

then you'll always be able
to recreate such a list on the fly.

Now, here are some examples
of important demand shifters.

For instance, changes in income
and changes in population.

Can you see through our example
how an increase in income

might cause people
to be willing to pay more

for a given quantity of a good,

or might cause them to want more
of that good at a particular price?

How about changes in population?

More people might increase
the quantity demanded

at a particular price

because there are more
potential customers.

Fewer people in the world
could decrease

the quantity demanded.

How about some other factors
which might shift demand curves?

Well, there are prices of substitutes,
prices of complements,

expectations, and changes in taste.

These are all a little bit trickier

but I'll go through them all
in a moment.

I just wanted for now to give you
a sense of some of the other things

which might also shift market demand.

Of course, everything I've said about
an increase in demand

applies just the same, but in reverse
for a decrease in demand.

A decrease in demand
is a shift inwards of the curve

toward the origin.

It again could be read in two ways.

It means that in any given price

there is less quantity demanded
at that price.

Similarly, for any given quantity

there is a lower willingness to pay
for the same quantity.

A decrease in demand means
a decrease in the quantity demanded

at every given price
or equivalently, a decrease

in the maximum willingness
to pay for each given quantity.

What might cause a decrease
in demand?

Again, I'm going to belabor
this point a little bit,

but a decrease in demand
is anything

that decreases
the quantity demanded

at a given price

or that decreases
the maximum willingness to pay

for a given quantity.

If you keep in mind

that is what a decrease
in demand means

then you'll always be able
to come up with factors,

which would decrease
market demand.

Let's look in more detail
at some of the demand shifters

beginning with income.

The effect of changes income
on demand

depends on the nature
of the good in question.

For more goods,
when your income goes up,

you demand more of that good.

Imagine that you're a poor student
right now but soon you'll graduate

and get a high paying job.

When you get that high-paying job,
when your income goes up,

you're probably going to demand
more automobiles,

more housing, and more fine dining.

These are all called Normal Goods

because the demand for them
goes up when incomes go up.

And of course the demand for them
goes down when incomes go down.

There are also goods however,
for which when your income goes up

your demand for them actually
goes down.

Again, when I was a poor student
for instance,

I actually sometimes went
to McDonald's

to buy a cheeseburger
because it was cheap.

When my income went up later,
I ate at McDonald's less often

and ate at better restaurants,
which of course cost more.

I haven't actually eaten
at McDonald's for many years.

An inferior good is one which
when your income goes up

the demand for it goes down
and vice versa.

For instance, think about soup.

Soup is a cheap and easy meal.

So during a recession,

the demand for soup
may well go up.

During boom times,

the demand for soup
may well go down.

Now, let's test your knowledge.

I suggest you get a pencil
and also a piece of paper.

Put down two demand curves.

Now we're going to think about
the demand for hamburger helper

and we're going to think about it
in two different situations,

namely, during a boom
and during a recession.

Here's our demand
for hamburger helper.

What is going to happen
to this demand

when the economy goes into a boom?

When people's incomes go up?

Now, draw the new demand curve.

What's that new demand curve
going to look like?

In a boom, the demand
for hamburger helper

is going to decrease

because hamburger helper
is an inferior good

so we get a decrease in demand.

What about in a recession?

Of course in a recession,
we get the opposite.

In a recession,
when incomes are going down

the demand for hamburger helper
is going up.

Here's another demand shifter,
namely population.

As the population
of an economy changes,

the number of potential buyers
of a particular good also changes.

For instance, what happens
to the demand for diapers in Russia

as birth rates drop?

Well, that demand is going to decrease.

In the United States,
as you probably know,

the baby boomers are getting older,

so we're having many more
elderly individuals

in the population.

Which products
will increase in demand

as the American population gets older?

Well, think about that for a moment.

Here are a few possible examples.

As the number of elderly
in the United States goes up,

we would expect an increase
in the demand

for cancer drugs, for instance.

Indeed as the population
has gotten older,

pharmaceutical firms
have invested more

in research and development
for producing drugs

for elder people.

We expect also as people get older,

the demand
for retirement communities goes up,

perhaps even the demand for golf.

How would we do this
on the demand curve?

Well, use an old demand curve

but as the population gets older

the demand for these products -
cancer drugs,

retirement communities
and golf equipment,

well that goes up,

so this curve shifts away
from the origin

and up to the right.

Here's another demand shifter -
the price of substitutes.

Two goods are substitutes

if an increase in the price
of one good

leads to an increase in demand
for the other good as well.

For example, suppose that the price
of Nike shoes goes up.

Well, that is going to increase
the demand for Reebok shoes

and vice versa.

Suppose instead that the price
of Nike shoes goes down,

that is going to decrease the demand
for Reeboks

as people switch from Reeboks
to the now cheaper good, Nike.

Another example.

What happens to the demand
for iTunes if songs on Spotify,

a competitor, become cheaper?

If Spotify is cheaper,

that's going to decrease the demand
for iTunes.

Another important demand shifter
is the price of complements.

Complements are goods
which tend to go together well.

Think for instance
if hotdogs and hotdog buns.

Technically, two goods are complements

if an increase in the price
of one of those goods

leads to a decrease in the demand
for the other.

Suppose for instance,
that the price of hotdogs goes up.

That means fewer people
are going to buy hotdogs.

That means that demand
for hotdog buns

is going to decrease as well
and vice versa of course.

Again, if the price of hotdog buns
goes down,

people are going to want
to buy more buns.

But then they're also going to want

to buy more of the complement
of hotdogs.

So the demand for hotdogs
will go up

when the price of the complement
hotdog buns goes down.

Here's another example.

What happens to the demand
for sport utility vehicles

when gasoline gets more expensive?

Cars and gasoline

or sport utility vehicles
and gasoline,

they're complements.

When you want one,
you also want the other.

So if gasoline gets more expensive,

that is going to decrease the demand
for sport utility vehicles.

Another important demand shifter
is expectations.

It can be expectations of events
or of prices.

In particular, if people expect
the price of a good

to be higher in the future,

that is going to tend
to increase demand today.

Consumers will adjust
their current spending

in anticipation
of what is going to happen

to future prices

in order to obtain
the lowest possible price

by buying more today.

For example, imagine you hear
there's going to be a hurricane.

If the hurricane hits,

you expect the price of batteries
is going to go way up

or perhaps
it's going to be very difficult

to even get any batteries at all.

That's going to increase the demand
for batteries today.

Something in the future,

that is this expectation
of a future event

can change the demand today.

Similarly, if people expect
that the price of the Xbox 360

is going to drop right before Christmas,

well then sales in November
will go down.

Apple has to deal with this problem
all of the time.

Each time people expect
a new iPhone model,

they stop buying the current version
of the iPhone.

So Apple doesn't want anyone
to know when a new iPhone

is going to be coming out

because otherwise
in the mean time,

the sales of the current product
will drop.

Taste is an important
demand shifter

and tastes change all the time.

Tastes differ among consumers
and they also differ over time

because of seasonal changes
or fashion or fads.

For instance, what happens
to the demand for boots

in October?

What happens to the demand
for swimsuits in June?

What happens to the demand
for sunscreen during the summer?

What happens when everyone thinks
that the Atkins diet

is going to cause them
to lose weight?

Let's take a closer look at that one.

The Atkins diet, if you recall,

was a diet which said
that carbohydrates make you fat

so the way to lose weight
was to consume more protein,

more red meat in particular.

What do you think was the effect
of the Atkins diet

on the demand for red meat?

It increased that demand.

What about the effect of the diet
on the demand for bread?

It decreased the demand for bread.

By the way, Atkins later
had a heart attack

and after he had this heart attack,

the demand for the Atkins diet
went down,

so these two factors
went into reverse.

The final point for this lecture
is a terminological one

and this will become more clear
after we've covered more of supply.

I'll come back to that

but for now I just want to give you
a heads up.

Unfortunately,

economists sometimes use
similar words

for different concepts.

In particular, a change
in the quantity demanded

is not the same as a change
in demand.

A change in the quantity demanded

is about a movement along
a fixed demand curve

due to a change in price.

For instance, as you recall,

we can say that at a price of $10,
the quantity demanded is 200.

When the price changes
and we move along this curve,

so then when the price falls to $5,

we see that the quantity demanded
is 420 units.

That's a change in quantity demanded.

It's a movement along
this fixed curve as we just saw.

A change in demand
is a non-price induced change.

It's a shift of the entire demand curve.

A change in demand
such as an increase in demand

is again a shift in this curve.

So keep these two differences in mind.

Change in quantity demanded
is a movement along a curve

due to changes in price.

A change in demand is a shift
of the entire demand curve

due to changes in income
or population or taste,

or any of the other factors
other than price

that we've talked about.

Anyway, those are the points for
now on demand curves. Thanks.

[narrator] If you want
to test yourself,

click Practice Questions

or if you're ready to move on,
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