A ActiveClossroom Nkenge Berry-Owens [HOUSTON ISD] Section 3: Changes in Demand What are these factors of demand that will shift the entire demand schedule, and therefore the demand curve? There are five we will considerincome, tastes and preferences, expectations for the future, change in the price of a substitution good, and the change in the price of a complementary good. Income As the income we earn changes, we change the quantity of cheeseburgers we will demand at every price level; we call this concept the income effect. As we increase our income, we increase our ability to purchase more goods that we want; therefore, we increase our quantity demanded at every price level. See Graph 10 above. On the other hand, if we decrease cur income, we will decrease our ability to purchase goods, and therefore decrease our quantity demanded at every price level. For example, if you get a raise, you can now afford to stop with your friends after work to grab a cheeseburger at the local McDonald's, whereas before, you didn't have enough money to spend on a cheeseburger even though you wanted one. You have now increased your demand for cheeseburgers at every price level because you have more income. See Graph 11. Graph 11: Increase in Demand Caused by Change in Income 3"\"; as)": I II at; 2 1%\" 1o 20 so 40 so no to so Q MWOICheueburgm There is an exception to the income effectas we earn more money, we will demand less of some goods. These goods are called inferior goods because we only buy them when we don't have much money. Choosing bologna as opposed to ham, hamburger as opposed to steak, and public transportation as opposed to your own car are just a few examples of inferior goods. A normal good is one you would demand more of as your income rises. Let's use an example. If you lose y0ur job, you have to cut back expenses, so you reduce your demand for steak and instead buy more hamburger meat, or even ramen noodles, depending on how poor you are. So, when you have less income, you will increase your demand for inferior goods like hamburger meat or ramen noodles while you decrease your demand for normal goods like steak. Finally, it is important to understand that calling a good an inferior good doesn't mean it is of very poor quality; it may or may not be. We simply define an inferior good as one that we buy less of as we earn more income. Let's get back to our example. There are always some students who say "but we love ramen noodles." Yes, that is true, but when you have a higher income, they are a @2022 Social Studies School Service Page 1 of 3 A AciiveClossroom Nkenge Berry-Owens [HOUSTON ISD] side dish; when you are poor, they become the main course (as many of you might find out after you begin college). Taste and Preferences Changes in our incomes have the biggest impact on changing demand for Demand increases normal goods. However, other factors, such as our tastes and preferences, -u 'o. and shifts to the {1 o . . _ r, -. nght 11' research or change our demand. Our tastes and preferences change all the time, f\" ' advertising tells us _ _ . _ _ that a product is sometimes by Our choice, sometimes by the effects of advertising, or . good for us. sometimes by Our reading new research about the safety of some goods. For example, clothing styles are constantly changing; partly because we D1 "-..D2 0 desire a new fashion look, and partly because advertisers tell us we need a _ Quanuty of F1311 new fashion look. Demand decreases and A few years ago, research showed that fish was a brain foodeating fl shifts to the left ifwe . . 9 nd out a t is makes you smarter. What do you think happened to the demand for fish. bad for us. sand Yes, it went up considerably. About five years ago, the Michigan Department of Natural Rescurces conducted some testing and found that most of the freshwater fish in Michigan's lakes and rivers were contaminated with mercury and other taxins that are bad for human consumption. When this information was released, it severely hurt the fish Qmmy \"5.511 industry in Michigan, and the demand for fresh fish fell. Since that time, the DNR has backed off and said it was probably safe to eat fresh fish from Michigan's lakes and rivers about once a week. We are constantly being bombarded with new information about the safety of foods and other goods. When it was discovered in 2006 that there was E. coli bacteria in some packaged spinach and salads, the demand for these goods fell drastically for a period of time; the same is true for tomatoes in the summer of 2008. Expectations for the Future The third factor shifting demand is our expectations for the future in terms , Demand Increases of our income and what we think will happen to prices. Many Americans 50 end ehiefe the 8' 0. right ifwe believe borrow to buy products now that they plan to pay for with future income. If '0. we will be better eff '. nancially in the we are afraid that Our future income is going to be decreased or completely eliminated, we would not borrow to spend now. What would we do? We would most likely save Our money now to caver the possible loss of income in the future. What would happen to the demand for normal goods? If we are saving our money, then we aren't spending it, and demand would fall. This is one of the reasons politicians and economists are reluctant to suggest that we are heading into a bad economic time, or what we call a recession. If households hear that we are going to have a recession, people worry they may lose their jobs, so they start saving and quit spending. Of @2022 Social Studies School Service Page 2 of 3 A ActiveClossroom Nkenge Berry-Owens [HOUSTON rsoi course, if enough of us quit spending, the economy would go into a recession; demand for all goods and services would fall as people save their money rather than spend it. Many people borrow money (credit) to spend now. if the availability of loans was limited, we would spend less, and therefore demand less now. Of course, the opposite would be true if credit became more readily available; we would borrow and spend more now, thus increasing demand. We also adjust cur demand based on what we think will happen to prices. Demand decreases and shifts to the left will increase our demand now for goods such as gasoline if we think the price ifwe believe there is going to be a will rise over the weekend. Have you ever noticed how new goods introduced recession or we may lose ourjob. \"Pd to the market cost a lot of money, but after they are on the market a while. their prices fall? This price drop is especially true with electronic goods like computers, TVs, and video recorders. Most people wait for prices to fall before they buy the latest technologically advanced TV or computer. Quantity of Cars Changes In Price of Substitution Goods The fourth factor to shift demand rs the change In the price of a substitution m... De \"mu\" and shifts to the felt ifthe price of a substitution good decreases. good. A substitution good is one good that can replace another good in that it is almost identical. For example, what might you substitute for a cheeseburger? How about chicken or pizza? Pizza might not taste just the same as a cheeseburger, but it is a substitution good enough for many people. It will serve as a reasonable replacement for a cheeseburger if the price of a cheeseburger becomes too high. When a good is identical to the WW "fcmumgm original good, we call it a perfect substitute. One gallon of gasoline is a perfect substitute for another, most of the time. if the price of pizza decreases considerably, people will substitute pizza for cheeseburgers. assuming pizza is a substitute for cheeseburgers. Just the opposite would happen if the price of pizza rises; people would buy more cheeseburgers and less pizza. This is the substitution effect. The prices of substitution goods will impact the demand for the original good. Change in the Price of e Complementary Good The final factor that will shift demand is the change in the price of a complementary good. A complementary good is one that goes with another good, like ketchup and a burger. As the price of a complementary good rises, the demand for the original good falls, and vice versa. The ultimate example is gasoline and cars. What has happened to the demand for large gas-guzzling SUVs and luxury cars as the price of gas has increased dramatically recently? The demand has fallen drastically, as American automakers have found out recently. Some goods don't have any relationship to each other; they are neither complementary nor substitution goods. We call these neutral goods. An example would be a car and a sweater. 02022 Social Studies School Service Page a of a