1. Increase in demand graph Decrease in demand graph
What factors affect demand?
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2. Increase in demand graph Decrease in demand graph
Price
Determinants of
Demand
Income
Number of
Buyers Prices of other
goods
Tastes
Expectations
about future
Quality
Supply?
3. Increase in demand graph Decrease in demand graph
PriceDeterminants of
Demand
Income
Number of
Buyers
Prices of other
goods
Tastes
Expectations
about future
Quality
Supply?
4. Increase in demand graph Decrease in demand graph
Price
• Price is the most important determinant of
demand.
• A “demand curve” plots combinations of
prices and quantity demanded.
• A shift in price causes a shift along the
demand curve
5. Increase in demand graph Decrease in demand graph
Price (continued)
• A change in price causes a shift along the
demand curve.
• A shift along the demand curve is referred
to as a “shift in the quantity demanded.”
• A shift in any other variable except price
causes a shift in the entire demand curve.
• A shift in the entire demand curve is
referred to as a “shift in demand.”
6. Increase in demand graph Decrease in demand graph
Income
• Changes in income can increase or decrease
demand.
• A good whose demand decreases with an
increase in income is called an “inferior
good.”
• A good whose demand increases with an
increase in income is called a “normal
good.”
7. Increase in demand graph Decrease in demand graph
Examples of changes in income
• An increase in income will reduce the
demand for ramen noodles or generic
products.
• An increase in income will increase the
demand for cars or clothing.
• An increase in income will significantly
increase the demand for air travel or
jewelry.
8. Increase in demand graph Decrease in demand graph
Prices of other goods
• Changes in the prices of other goods can
increase or decrease demand.
• A good that causes an increase in the
demand for another good when its price
increases is called a “substitute good.”
• A good that causes a decrease in the
demand for another good when its price
increases is called a “complementary good.”
9. Increase in demand graph Decrease in demand graph
Examples of changes in other
prices
• An increase in the price of peanut butter
will reduce the demand for jelly. Peanut
butter and jelly are complements.
• An increase in the price of Pepsi will
increase the demand for Coke. Pepsi and
Coke are substitutes.
10. Increase in demand graph Decrease in demand graph
Number of buyers
• An increase in the number of potential
buyers will increase the demand for the
good.
• For example, the demand for land increases
as the population increases.
• Similarly baseball tickets are generally
more expensive in larger cities.
11. Increase in demand graph Decrease in demand graph
Future Prices
• An increase in the expected future price of a
good increases current demand.
• A decrease in the expected future price of a
good decreases current demand.
• For example, when a good is temporarily
put on sale, people stock up on the good.
12. Increase in demand graph Decrease in demand graph
Tastes
• Demand curves can shift due to changes in
tastes over time.
• For example, demand for cereal may be
high in the morning but low at night.
13. Increase in demand graph Decrease in demand graph
Quality
• Demand curves can shift due to changes
quality.
• At a given price, demand for Pizza hut’s
pizza is higher than the demand for Papa
John’s.
• Similarly, CDs cost more than cassettes
because the music is of higher quality.
14. Increase in demand graph Decrease in demand graph
Supply?
• Demand curves do not shift due to changes
supply.
• Shifts in supply change the equilibrium
price causing a shift along the demand
curve.
• Shifts in supply cause a change in the
quantity demand not a shift in the demand
curve.
15. Increase in demand graph Decrease in demand graph
Increase in demand
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Quantity
Price
Old demand New demand Supply
• An increase in
demand shifts the
demand curve to
the right.
• Equilibrium price
increases.
• Quantity demanded
increases.
16. Increase in demand graph Decrease in demand graph
Decrease in demand
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25
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Quantity
Price
Old demand New demand Supply
• A decrease in
demand shifts
the demand
curve to the left.
• Equilibrium
price falls.
• Quantity
demanded falls.