1. Aggregate Demand Curves and Shifting Demand Punchline: Aggregate demand curves are not the same as the sum of individual curves.
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3. How do we react when prices rise? Orthodox: MU and downward sloping demand curves: We buy less until our MU equals the new, higher price Real World: Social demand Sometimes we buy more when others want something; higher prices signal status
4. It depends on whether we consume as individuals or as part of a group Do you shop for yourself? Then why do some many of us dress alike? Men dress like men; women like women. If dresses fell in price would men wear them?
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6. “ Veblen Effectts” after Thorstein Veblen (1857-1929) Veblen was different. He had many affairs, with married women, and with his (female) students. In The Theory of the Leisure Class (1899), he said that we buy to impress, “ conspicuous consumption ”.
7. Veblen argues that we consume to impress others We buy things to signal to others that we are successful. Does this explain why some people wear such uncomfortable clothes?
8. Sometimes we buy what others buy to join the crowd. Status is in doing what others do, but a little better. Does this explain why men don’t wear dresses, but women do? Some things help us to fit in:
9. Sometimes we follow the crowd because we think they know better Prices tell us how others rate a product. Sometimes we value their judgment. How else do we know if we are buying a BMW, or a lemon?
10. How do we know what we are buying? A study using brain imaging found people like wine better if they believe it is expensive. Higher prices validate our choices It was hard to drink wine in this
11. If everyone else starts to buy something, how do we react? Do we stop buying it because the price has gone up? Or do we buy more because we are now part of a larger network of people who consume the same thing? Do you want to be the only one with a metric ruler?
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13. Sometimes we want what others have because it is convenient to be part of a network It can be easier to communicate with those who consume like us. It is easier to get spare parts. And help. Maybe not enough
14. Maybe aggregate demand curves look like this? Higher prices go with higher demand because prices signal quality and status. Even if there is diminishing MU.
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16. When demand curves move out More will be purchased at any price; or consumers will pay more for the same amount. P Q
17. When demand curves move in Less will be purchased at any price; or consumers will pay Less for the same amount. P Q
18. Examples of moving demand curves Changing preferences: Stuff that people don’t want anymore VHS tape players: Prices have fallen but people still won’t buy. You can get one for free at the town landfill. Stuff that people now really want. Hybrid cars: Despite rising prices people are buying more.
19. What moves demand curves, 2: Changes in income China and India are getting rich enough to buy oil, increasing world demand
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22. A substitute is consumed instead of something P Q When the price of pot rises, demand for beer increases Beer market Substitutes
23. Social factors move demand curves: Fads , social infrastructure , and networks I put Beethoven here because everyone is supposed to like his music.
24. Fads Social preferences change When other people decide they like something, it is more desirable and the demand curve shifts out even more. How else to explain the Jonas Brothers? Or Twilight?
25. Social Infrastructure Social substitutes and complements Society can shift demand curves by providing infrastructure : roads, bridges, airports, fiber-optic cables, sewers and water supplies, etc..
26. Infrastructure Investment works as a complement or a substitute It can increase demand (shifting the demand curve out) when it is a complement. For example, airports and jet fuel. Or it can be a substitute, reducing demand (shifting demand curves in). For example, roads and demand for mass transit.
27. What would happen to the demand for cell phones if there were no cell towers? Or demand for cars without roads? Or demand for cars if we had really good mass transit and bicycle lanes?
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Editor's Notes
In the orthodox neoclassical theory, people buy additional units until the diminishing marginal utility equals the price. They buy more at lower prices because they will buy until a lower MU. In the real world, however, people may buy less if lower prices signals lower quality, and more at higher prices if they signal higher quality.
Consumption is a social act: we consume to send signals to other people, and we judge the quality of goods by how much others spend on them.
Wearing uncomfortable clothes signals that we are so rich that we do not need to work.
Consuming is a way of relating to others, being part of a group. The more our friends buy, the more valuable these consumer items are to us and the more we are willing to pay for them.
Prices signal quality: if others are spending a lot on an item, we figure that they know that this is valuable and of high quality.
Our consumption may be more efficient and give us greater pleasure if we buy the same things that others consume because then we can share enhancements, it is easier to get repairs, and we can fit into a network .
Note that individual demand curves are downward sloping because of diminishing marginal utility. But even with diminishing marginal utility and downward sloping individual demand, the community may have an upward sloping demand curve because we will buy more when others buy more.
A movement in the demand curve means that we will buy a different amount at any price. This is distinguished from a movement along the demand curve where we buy a different amount because the price has changed.
When the demand curve moves out, it is the same as saying people will pay more for any quantity or that people will buy more at any price.
When the demand curve moves in, it is the same as saying people will pay less for any quantity or that people will buy less at any price.
Products that people don’t like anymore, they will buy less at any price and will buy the same amount only at a discount. How much would you pay for a VHS tape? On the other hand, stuff that people like more, they will pay more for any quantity and will buy more at any price, such as hybrid cars or smart phones.
Society also affects demand curves. If you have a community with good road infrastructure, roads and parking, then you will be more interested in cars. If your community has good mass transit, you have less interest in cars. If your community has bad water, you are more interested in bottled water; good cable service, you have more interest in computers.
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