Determinants of Demand

Review: Change in Quantity Review: Change in Quantity DemandedDemanded

Quantity

Price

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On to … Determinants of Demand

DETERMINANTS OF DEMANDChanges in income

Changes in the prices of related goods Substitutes: goods that can replace one

another Compliments: goods that are consumed

together

Changes in the size or composition of the population

Change in price expectations

Changes in tastes/preferences

Practice Problem #1

What would happen to the demand of pizza if you find out pizza causes heart disease? • Determinant?• Increase or decrease in demand?

Answer to Practice Problem #1

What would happen to the demand for pizza if you find out that pizza causes heart disease?

• Determinant - A change in consumer tastes/preferences; consumer expectations

• Decrease in demand

Practice Problem #2

What would happen to the demand of Nike shoes if it is the favorite shoe of many sports celebrities?

• Determinant?• Increase or decrease in demand?

Answer to Practice Problem #2

What would happen to the demand of Nike shoes if it is the favorite shoe of many sports celebrities?

•Determinant – A change in consumer

tastes/preferences•Increase in demand

Practice Problem #3

•A new energy drink comes to market that does not have negative side effects (e.g., jitters, crashes).

•Determinant?•Increase or decrease in demand of Red

Bull?

Answer to Practice Problem #3

•A new energy drink comes to market that does not have negative side effects (e.g., jitters, crashes).

•Determinant – A related good (substitute)•Decrease in demand of Red Bull

Practice Problem # 4

•Student allowances and the minimum wage for work increases.

•Determinant?•Increase or decrease in demand of video

games?

Practice Problem # 4

•Student allowances and the minimum wage for work increases.

•Determinant – Income increase•Increase in demand of video games

Movement Along a Demand Curve Versus a Shift of the Curve

• Remember there is a difference between quantity demanded and demand.

• Markets never stand still, there are always outside factors that change the actual price of the good or how much is demanded altogether.

• A change price creates a change in the quantity demanded, other things constant. ▫ This causes a movement along the demand curve.

• A change in one of the determinants of demand causes a change in demand.▫ This causes in a shift of a demand curve. Or a new

curve.

What determinants would increase the market demand for pizza?

Determinants Increasing Demand•Increases in income•Increases in population•Increase in prices of substitute goods•Decrease in price of complement goods•Consumer expectation that prices will

increase in the future•Improvement in taste•Increased consumer preferences

Determinants of increased demand change the story….. How so?

Quantity demanded of pizza per week (by millions)

Price of pizza

15 $15.00

20 $12.00

25 $9.00

30 $6.00

35 $3.00

--- $0.00

Quantity demanded of pizza per week (by millions)

Price of pizza

9 $15.00

14 $12.00

19 $9.00

25 $6.00

30 $3.00

--- $0.00

Original Story New Story

8 14 20 26 32Millions of pizzas per week

$15

12

9

6

3

0

Pri

ce p

er

piz

za

D1

How would determinants of increased demand change the picture of demand?

b

8 14 20 26 32Millions of pizzas per week

$15

12

9

6

3

0

Pri

ce p

er

piz

za

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Increased Market Demand for Pizza

D2

fb

What determinants would decrease the market demand for pizza?

Determinants Decreasing Demand•Decreases in income•Decreases in population•Decrease in prices of substitute goods•Increase in price of complement goods•Consumer expectation that prices will

decrease in the future•Deterioration of taste•Decreased consumer preferences

Determinants of decreased demand change the story….. How so?

Quantity demanded of pizza per week (by millions)

Price of pizza

5 $15.00

10 $12.00

15 $9.00

20 $6.00

25 $3.00

--- $0.00

Quantity demanded of pizza per week (by millions)

Price of pizza

9 $15.00

14 $12.00

19 $9.00

25 $6.00

30 $3.00

--- $0.00

Original Story New Story

8 14 20 26 32Millions of pizzas per week

$15

12

9

6

3

0

Pri

ce p

er

piz

za

D1

How would determinants of decreased demand change the picture of demand?

b

b

D2

Decreased Market Demand for Pizza

8 14 20 26 32Millions of pizzas per week

$15

12

9

6

3

0

Pri

ce p

er

piz

za

j

D1