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 in
gasoline or sport utility vehicles on

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

overtime 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 things 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 450 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.

- If you want to test yourself,
click Practice Questions or if you're

ready to move on, just click Next Video.