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Price of Other Goods - The demand for one product will be affected by changes in the prices of others. If one supermarket runs a special offer on fresh salmon then it is likely that it will sell more salmon. But other supermarkets will be affected as their sales of salmon will be hit: demand will fall even though there has been no change in the price of their product. Relative prices have changed. In this case the two products are close substitutes for each other and a fall in the price of one causes the demand for the other to fall.
Substitutes - This is where you have choice. One product is a substitute, or an alternative or replacement for the other
Complements - Things that go together, like pork and apple sauce, knives and forks, strawberries and cream are all complements, or they are in joint demand
Real is goods and services we can buy with our money
Disposable is the money we receive after paying taxes.
Real disposable income is the goods and services we can buy with the money have left after tax.
Goods and services will have an increase in demand when real disposable income rise.
But inferior goods will experience a decrease in demand as incomes rises.
Credit cards are the most popular form of credit nowadays. They finance a large proportion of our consumption. If it becomes easier or cheaper, demand for goods and services will increase.
If consumers expect prices to change at some point stage in the future, then they may choose to increase their demand now. In the same way, if they expect prices to fall, then they may delay their purchases, leading to a fall in demand now.
The demand for a product will be affected by consumers' taste. Over time fashions change and tastes change. This particularly important in the clothing industry
Increase in Demand
The consumer buys a new product when there is an advertisement of it. Or else the consumer won’t buy it. Successful advertisement persuades people to buy, so the demand curve for the product shifts to the right.
Decrease in Demand
Negative stories in a press, causes decrease in demand, :. Demand curve shifts to the left.
For many products, demand will change according to the time of year or the climate. Umbrella manufacturers will undoubtedly increase sales during the winter
A rising population generally brings with it rising levels of demand.
Growth in the birth rate means that there is a growing demand for health care and education. Companies catering for the taste of young people expand. A population may grow by a fall in the death rate. It will be an ageing population. The demand for hearing aids, rest homes and bowling clubs will increase.
THIS IS THE ONLY DETERMINANT THAT WHEN IT CHANGED DOES NOT SHIFTS THE POSITION OF THE DEMAND CURVE
Shifts of the demand curve and moves along the demand curve
A change in price will produce a movement along an existing demand curve, but a change in one or more of the 'ceteris paribus' factors will shift the demand curve to a new position.
N.B. The demand curve is drawn on the assumption that only price has changed and everything else has remained the same. In reality many factors are changing at the same time, but if we are to analyse the factors causing a change in the market, we first need to isolate each of the factors. This assumption, known as 'ceteris paribus' enables us to do this.
Movements along the demand curve
When the price of the good, and only the price, changes there is a movement along the demand curve. A movement up a demand curve, to the left, is known as a contraction. The price rises and demand falls. A movement down the demand curve is known as an expansion. Both these are shown in the diagrams below.
Figure 3 Expansion in demand Figure 4 Contraction in demand
Shifts of the demand curve
These will occur as a result of any factor, apart from price, changing. A shift of a demand curve to the right will mean that more will be demanded at each and every price. A shift to the left will reduce the quantity demanded at each and every price. These possibilities are shown below.
Figure 5 Increase in demand Figure 6 Decrease in Demand
A shift to the right, an increase in demand at each and every price, will come from one or more of the following;
- A rise in the price of a competitor's products
- An effective advertising campaign by the manufacturer
- A rise in the real income of the purchasers
:. Ask yourself three questions:
- Has a 'ceteris paribus' factor (other determinant of demand) changed? If the answer is yes, then there is a shift.
- Will demand increase or decrease? This will determine if the shift is to the right or left?
- If the price has changed, will there be an extension or contraction of demand?
Exceptions to the normal law of demand
We have assumed so far that demand curves slope downwards to the right, and most of the time this is true. However, there are a few circumstances where it is possible for the demand curve to slope upwards to the right. This may be for the whole curve or, more likely, it may be over a certain price range as shown in figure 1. This is often termed a perverse or upward sloping demand curve.
Figure 1 Perverse demand curve
There are two particular types of goods where this may occur and they are called Giffen goods and Veblen goods. Let's look at the definitions of these.
Giffen good
A Giffen good is a good for which a decrease in price results in a fall in demand for the good. It is an extreme inferior good and will have a perverse (i.e. upward sloping) demand curve.
Veblen good
A Veblen good (named after an American economist - Thorstein Bunde Veblen) is a good that has an upward-sloping demand curve. People buy more of the good because it is more expensive and therefore demand is higher when the price is higher.
Giffen goods
In some poor countries the people often live on a basic diet of rice which is very cheap plus a few more expensive vegetables or some much more expensive meat. In such societies, if the price of rice rises then the people may well decide to buy more in order to substitute it for the more expensive vegetables and meat. There has been an increase in demand in response to an increase in price. Sir Robert Giffen fist noticed this phenomenon. In the 19th century he saw that the demand for potatoes increased in response to the rises in the price of potatoes caused by the great potato famines in Ireland. Hence products of this kind are known as Giffen goods. → when price of rice rises, the price of the other foods are also rising, bec of war / inflation, so people chose to buy only rise bec it sustains more.
Veblen good – ostentatious good
Examples of Giffen goods are difficult to find in richer countries. Some text books do suggest that after-shave or perfume come into the same category but this is not the case. With these products a rise in price is often interpreted by the consumer as an increase in quality and so they may decide to buy more, thinking that they are buying a superior product. There may be psychological factors at work. The economist Veblen carried out research into this and concluded that the price of a product conveyed more than just value information for the consumer; it also represented status and exclusivity. These products which appear to experience rising demand with rising price are known as Veblen goods.
IN BOTH CASES, WHEN PRICE RISES PEOPLE BUY MORE, WHEN PRICE DECREASES PEOPLE BUY LESS, THE ONLY DIFFERENCE IS THE TYPE OF GOOD.
Price expectations
It is also possible for goods where price expectations are critical to have perverse demand curves. This is because if people expect prices to increase further, then they may buy more now. In this case it appears that an increase in price has increased demand, but in reality this has come about because people expect prices to rise even further in the future.