Shifts in the Demand Curve Chapter 4 Section 2

D E M A N D Objectives: Understand the difference between a change in quantity demanded and a shift in demand curve. Identify the determinants that create changes in demand and that can cause a shift in the demand curves. Explain how the change in the price of one good can affect demand for a related good.

Section 1 QUIZ 1. What is Demand? 2. What is the Law of Demand? 3. What is the Substitution Effect? 4. What is the Income Effect? 5. Demand Curve is always _____ sloping to the ______!

Section 1 Quiz Demand - It is the desire to own something and the ability to pay for it. The Law of Demand – it says that when a good’s price is lower, consumers will buy more of it. Substitution Effect - When consumers react to an increase in a good’s price by consuming less of that good and more of other goods. Income Effect - The change in consumption resulting from a change in real income. Demand Curve - is always downward sloping to the right!

Section 1 Review/Quiz Income Effect – you cut back on your purchases without substituting another product. Economists measure consumption in the amount of a good that is bought, not the amount of money spent. Schedule/Graph show the relationship between the price of a good & the quantity that a person (or market) will purchase.

D E M A N D Focus: What would happen to sales of the new Chevrolet Camaro if this vehicle was to emit no pollution, was more powerful than previous engines, and would cost the same?

D E M A N D It would appear that a pizza owner would only have to pick a price and quantity combination that will earn them the highest profit. True or False

D E M A N D Other factors have an effect… What would happen if the day after a pizza owner printed new menus to reflect the price changes, the government announced that tomato sauce had a natural chemical that will strengthen the immune system. What would happen to the demand for pizza?

D E M A N D Demand for pizza at all prices would climb (increase)- Shift to the Right! W H Y ?????

D E M A N D When we count the number of pizza slices that would sell, we assume that nothing besides the price will change.

D E M A N D Economists refer to this assumption as ceteris paribus… Latin meaning “All other things held constant.” Demand Schedule takes into account only the price change. It does not take in news reports or any other factors / variables.

D E M A N D Changes in Demand…. A demand curve is accurate only as long as there are no changes other than price. When the price changes, we move along the curve to a different quantity demanded.

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D E M A N D This movement along the demand curve is referred to as a decrease or increase in the quantity demanded. When we drop the ceteris paribus rule and allow other factors to change, we no longer move along the demand curve.

D E M A N D Instead, the entire demand curve shifts. A shift in the demand curve means that at every price, consumers buy a different quantity than before. The shift of the entire curve is what economists refer to as a change in demand

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D E M A N D Quiz review of material… What does “Ceteris Paribus” mean? What is Change in Demand? What two movements can be made along the demand curve?

D E M A N D What causes a shift? Change in the price of a good does not cause the demand curve to shift. The effects of change in price are already built into the demand curve. Other factors can cause demand for a good to change.

D E M A N D Examples: Income – A consumer’s income affects their demand for most goods. Most items that we purchase are normal goods. – goods that consumers demand more when their incomes increase.

D E M A N D Inferior Goods – because an increase in income causes demand for these goods to fall.

D E M A N D Consumer Expectations Our expectations about the future can affect of demand for certain goods. Example: You want a new car, but have heard that the slash on 2008 cars will happen in October. You wait until then to buy a new car.

D E M A N D Population Change in the size of the population will also affect the demand for most products. Example: a growing population needs to be housed and fed. Leads to a demand in houses, food, and other goods and services.

D E M A N D Consumer Tastes & Advertising Advertising campaigns, social trends, the influence of television shows, or some combination of these factors that make a product the next Fad! Changes in tastes and preferences cannot be explained by changes in income or population or worries about future price increases.

D E M A N D Advertising is considered a factor that shifts demand curves because it plays an important role in many trends. Stop!

D E M A N D What is a Complement? What is a Substitute? What is an Independent Good?