Ch. 4 Sec. 2 Reading Strategy Determinants Of Demand
Content Vocabulary
change in quantity demanded
Change in Demand vs Change in Quantity Demanded, 5:13
In-class assignment
What happens to demand? Is there anything that could alter the underlying demand? What does a shift to the left indicate? What happens when apartment rent increases? Is a house a substitute? What is the difference between change in demand vs change in quantity demanded?
income effect
substitution effect
Substitution goods represent another factor influencing demand. A substitution good is one that has a similar utility as another—they both satisfy a similar need. If the cost of the substitution good changes, the demand for our original good will be affected. If the price of Twinkies falls, donut eaters may flock to the vanilla crème filled sponge cake that has been “tantalizing taste buds and filling lunch boxes since 1930.” As a result, our demand curve would shift to the left like this.
Income and Substitution Effects, 4:05
In-class assignment:
We want to consider Jimmy. What are Income and Substitution Effects? How do they work? How do they add up to the total price effect? What is the substitution effect? What is the income effect?
Like music? When you buy a record, do you prefer to purchase a digital download from the internet or a physical CD or vinyl from a music shop?
In economic terms, CDs and digital music files are complementary goods. The low price for digital downloads (free if you bootleg, a buck or so per song at legit stores like iTunes) has caused demand for more expensive physical CDs to crater.
In 2000, Americans bought 942 million CDs, spending some $13.2 billion. Five years later, as digital music boomed, CD sales had fallen to 705 million units and $10.5 billion in sales.
The future, clearly, is in the download market. Music on shiny silver plastic discs may soon go the way of the 8-track.
change in demand
There are some goods that have relatively static demand curves. In particular, some goods remain in constant demand regardless of changes in the price. Demand for these goods is called inelastic. (If the demand for a good is sensitive to price changes, it is called elastic.) A handful of factors influence the price elasticity of demand of a particular good: its importance, the availability of substitutes, and the percentage of our income that it costs us.
If a good is essential and we cannot do without it, demand for the good will remain constant regardless of changes in price. Medicine and milk are basic necessities; we will buy them even if the price rises. We will also continue to buy products if there is no substitute or alternative for that product. We can’t substitute water for gasoline; face power is white but it is no substitute for salt. And if a good is cheap, we will buy it even if its price rises. We would spring for a box of matches, even if the price jumped from 79 cents to $1.25.
So let’s review the essentials. The law of demand tells us what we all know—that when prices go up demand goes down and when prices go down demand goes up. Demand measures the amount of a good or service that people are willing and able to buy at a specified price. And a demand curve plots the size of demand at various prices. Several factors influence demand: diminishing marginal utility, income, substitution goods, complementary goods, and tastes or preferences. And the more that a price change influences our willingness and ability to buy a product, the more elastic is that product’s demand.
Factors that Increase Demand, Shifting Curve to the Right:
- Increased income
- Increase in price of substitution goods
- Decrease in price of complementary goods
- Changing consumer tastes
- Decreased income
- Decrease in price of substitution goods
- Increase in price of complementary goods
- Changing consumer tastes
Remember our delicious and entertaining complementary goods, baseball tickets and hot dogs?
Turns out that sales in baseball tickets and Dodger Dogs don't track each other perfectly. Since the economy went into decline a couple years back, prices for baseball tickets have held steady or even increased. But attendances haven't fallen too dramatically. Ballpark hot dog sales, though, have fallen off sharply.
What does that mean? It means that hot dogs have greater price elasticity than baseball tickets. People still want to go to the ballgame, even if tickets become more expensive relative to incomes. But they're willing to forego the extra five or ten bucks they might have spent on an overpriced hot dog once they're inside.
Ballpark concession owners from coast to coast must be crying into their $12 "souvenir cup" beers.
substitutes
complements
Complementary goods also impact demand. Complementary goods are goods that go together or are related: beer and pretzels, cameras and film, polyester bell bottoms and platform shoes, Rogaine and hair gel.
When the price of one good changes, its complementary good is affected. If film prices increase, people will buy fewer cameras. If polyester bells drop in price, demand for the four-inch platforms that best highlight the timeless lines of the disco-era bad-boys will rise. And so on.
The demand curve for a good will shift to the left if the price of its complementary good increases. And vice versa.
One awesome example of complementary goods: baseball tickets and hot dogs. Because what goes better with America's pastime than a delicious piece of mystery meat on a bun, with ketchup and mustard?
| Top 10 Hot Dog Baseball Stadiums for 2005 | ||
|---|---|---|
| Stadium | Hot Dogs Sold | |
| 1 | Dodger Stadium (Los Angeles) | 1,674,400 |
| 2 | Coors Field (Colorado) | 1,545,000 |
| 3 | Wrigley Field (Chicago) | 1,543,500 |
| 4 | Yankee Stadium (New York) | 1,365,000 |
| 5 | Minute Maid Park (Houston) | 1,248,000 |
| 6 | Edison Field (Anaheim) | 1,133,000 |
| 7 | HHH Metrodome (Minnesota) | 850,000 |
| 8 | Citizens Bank Park (Philadelphia) | 800,000 |
| 9 | Shea Stadium (New York) | 745,000 |
| 10 | U.S. Cellular Field (Chicago) | 495,000 |
Academic Vocabulary
principle
illustrated
Reading Strategy
Companies in the News
McMakeover Deluxe
Change in the Quantity Demanded
The Income Effect
The Substitution Effect
Reading Check
Describing
How is a change in the quantity demanded illustrated on the demand curve?
Figure 4.4 Change in Demand, p. 99
In-Motion Animations
Change in Demand
Cf. http://glencoe.com/sites/common_assets/socialstudies/in_motion_08/epp/EPP_p99.swf
Figure 4.4 Change In Demand
Change in Demand
Consumer Income
The Global Economy and You
Digital Demand in South Korea
Consumer Tastes
Substitutes
Complements
Expectations
Number of Consumers
Reading Check
Explaining
How do changes in consumer income and tastes affect the demand curve?
Ch. 4 Sec. 2 Section Review Determinants Of Market Demand
