Shifts of the Demand Curve

Shifts of the Demand Curve Students will be able to define and/or identify the following terms: Ceteris Paribus Shifts in the Demand Curve Factors that Shift a Demand Curve Complements E. Napp

While the price of a good influences a consumer’s decision to purchase, it is not the only factor. E. Napp

Ceteris Paribus • “CETERIS PARIBUS” LATIN: “OTHER THINGS EQUAL” MEANING THAT ALL OTHER THINGS STAY THE SAME. • A demand curve assumes “Ceteris Paribus” (only price is changing- all other things stay the same). • In other words, a demand curve only looks at price. It does not consider other factors that influence demand. E. Napp

Shifts in the Demand Curve • WHEN A DEMAND CURVE SHIFTS THE PRICE CHANGES FOR EVERY QUANTITY (UP OR DOWN) • Price can never shift a demand curve because price is in the demand curve. • TO SHIFT A DEMAND CURVE, IT MUST BE SOME FACTOR OTHER THAN PRICE. E. Napp/Helf

Here is a simple rule to remember: If the curve shifts left, left means less. Demand has decreased at every price level. If the curve shifts right, right means more. Demand has increased at every price level. E. Napp

Certainly, an outbreak of Mad Cow’s Disease would decrease demand for beef at every price level. E. Napp

Factors that Can Shift a Demand Curve • THESE FACTORS CAN SHIFT A DEMAND CURVE: Advertising Population Consumer Taste Consumer Expectations about Future Prices The Price of Complements The Price of Substitutes E. Napp

ADVERTISING • Make people want an item more • Inform people of a new product • New features • Disparage the competition E. Napp

Population • Affect demand by increasing or decreasing the total number of consumers • Change in demographics: Targeted wants E. Napp

Consumer Taste • Fads- The next “new” thing • Items become more or less popular E. Napp

Expectations of future price • If you expect the price to go up in the future, your CURRENT demand increases. • If you expect the price to go down in the future, your CURRENT demand decreases E. Napp

Substitutes, Complementsand Ingredients. • SUBSTITUTE: GOOD THAT REPLACES ANOTHER • COMPLEMENT: GOODS THAT ARE RELATED • INGREDIENT: A RESOURCE NECESSARY TO PRODUCE A FINISHED GOOD • Car=> Steel, Tires, Engine INGREDIENTS • Coffee=>Sugar, Creamer, Donuts \ • Noodles=> Cheese, Tomato Sauce/ Complements

Prices of compliments • If the price of a compliment changes (goes up or goes down) the demand for the good changes

Prices of substitutes • If the price of a substitute DECREASES, your demand for the original good DECREASES. • (And vice versa)

Law of Diminishing Marginal Utility • CONCEPT THAT AT SOME POINT, THE BENEFIT OF THE NEXT ADDITIONAL UNIT DECREASES

As any parent will tell you, sometimes cereal is only bought for the toy inside. E. Napp

D is the original demand curve D1 is the demand curve after it has shifted. Notice that by shifting to the left, demand has decreased at every price level. E. Napp

If we think the price of a popular good will drop, we will buy less at all price levels today and wait for the future lower price. E. Napp

Questions for Reflection: • State the Law of Demand. • What is the relationship between the law of demand and Ceteris Paribus? • Why can price not shift a demand curve? • What factors can shift a demand curve? • Provide an example of a complement. • What happens when a demand curve shifts left? Right? E. Napp

Shifts of the Demand Curve