Now we know, the demand is just a collection of price-quantity demanded combinations, showing
(all else constant) that price and quantity demanded are inversely related.
Question: What happens to demand if price goes up?
Answer: nothing.
Look; if I started out at price P1, then I would see that the associated willingness
to purchase (or quantity demanded) is Q1.
Now price goes up to P2.
What happened in the demand line?
Nothing.
But we do see a new lower willingness to purchase (quantity demanded) at Q2.
The demand itself did not change, since both of the combinations (P1,Q1, and P2,Q2) were
already part of the existing demand curve.
A change in the price of the product itself will NEVER change the underlying demand, only
the quantity demanded, shown by a movement along the existing demand curve.
Is there anything that could alter the underlying demand, causing it to move either to the right
(indicating that there is a greater willingness to purchase, even without a price change),
or to the left (indicating a decreased willingness to purchase, even at the same price)?
Well, yes -- the change in any of the other factors -- other than the product price -- will
fundamentally alter the underlying demand.
Like what?
Well, any of that other stuff.
OK, for instance, if I stick with the housing market example, a change in the price of housing
will not shift the demand.
Rather, it will cause movement along the existing demand for housing, or a change in the quantity
demanded.
BUT -- what about mortgage rates?
Even if housing prices are unchanged, an increase in mortgage rates leads to a lower willingness
to buy at all prices, and of course lower mortgage rates would lead to an increased
willingness to buy at all prices.
What about changes in related markets?
For example, take a look at the link between the market for apartments in the market for
houses.
Initially the price of a typical apartment is P1.
Q1 apartments get rented, and there is some demand in the related market for homes.
But what happens when apartment rents increase?
Sure, some folks will just pay the rent increase, but others will start thinking, ”Is this
worth it?
Wouldn’t it be better for me to put my money into my own home, instead of giving it to
a landlord every month?”
Such individuals now move over to the housing market, causing a greater quantity demanded
at every existing price; that is, the market demand shifts to the right, showing the effect
of a change in a substitute product market.
What about, say, changes in income?
Typically you would expect that as a person's income rises, that person would purchase more
goods and services.
If indeed this is the result, that is, an increase in income leads to an increase in
demand, then the product is a normal good.
Occasionally, however, an increase in income may result in a decrease in demand for a particular
good.
If this happens, you're dealing with an inferior good; typically, inferior goods are low-budget
items where, if you had more money, you’d buy something else -- something nicer – instead.
You know – ramen noodles, mac & cheese, canned tuna, generic brands, that type of
thing.
We could even use the housing example again, where demand for apartments (or living with
your parents) falls as your income rises, and you look for a home of your own.
In this example, the homes are normal good, and apartments are inferior good.
What about expectations?
From 2003 to 2005, investors expected huge increase in home values, especially in the
Phoenix metropolitan area.
What happened to the demand for houses?
Because everyone expected higher prices tomorrow, there was a rush to buy the homes today.
OK, one more example of demand shifter: what about the price of complementary goods, commodities
that must be used in conjunction with this product?
In the housing example, wouldn’t Homeowners’ Association fees affect the home-buying decision?
Perhaps an even better illustration of complementary goods would be gas and cars.
In the 1990s, gas was cheap -- oil was $22 a barrel and gas was about a dollar a gallon.
And demand for cars -- especially trucks and SUVs -- was high.
In 2008, oil hit $140 per barrel, and gasoline hit four dollars plus per gallon.
How did this affect the demand for cars, especially the gas guzzlers?
There is a critical difference between a change in demand and a change in quantity demanded.
Can you distinguish between the two?
A change in quantity demanded is a movement along the existing demand, caused by change
in the price of product.
A change in demand is a shift of the entire demand curve, caused by a change in anything
that affects your willingness or ability to buy, other than the product price.
NEXT TIME: Supply TRANSCRIPT0EPISODE 12: CHANGE IN DEMAND VS.
CHANGE IN QUANTITY DEMANDED