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NIU ECON 260 - Microeconomics - Demand Part 2

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ECON 260 1st Edition Lecture 4Outline of Last Lecture1. Pre-Lecture Video 0002, “Demand” – Key Concepts2. Consumer Choice and Demand, part 1Outline of Current Lecture 1. Review2. Consumer Choice and Demand, part 2a. Factor 1: Change in incomeb. Factor 2: Change in taste and preferencesc. Factor 3: Change in the price of related goodsi. Substitutesii. Complementsd. Factor 4: Expectatione. Factor 5: Change in the number of buyersCurrent LectureReview The demand curve is a visual representation of the law of demand. - The slope always moves downward- It can be read horizontally - given price as a starting point, one can find the corresponding quantity. - It can be read vertically - given quantity as a starting point, one can find the corresponding price.Consumer Choice and Demand, part 2The demand curve shows how we respond to changes in price. We show other factors by shifting the demand curve.*Note: Changes in the market only mean a shift in the demand curve if thatchange is not already present on the graph as it is. When there is a change in quantity demanded, this means the price increased, but nothing else haschanged about the quantity (it costs the same to make, people still like it theThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.same amount, etc.), and there is movement along the existing slope, because quantity as it is is already on the graph. The demand curve shifts when there is a change that does not already appear on the graph. The five factors that cause these shifts are:1. change in income2. change in taste and preferences3. change in the price of related goods4. expectation5. change in the number of buyers*Note* It’s best not to think about these factors as going “up and down” or “higher or lower.” It is a shift along the horizontal axis. When demand increases, the demand curve shifts to the right; when demand decreases, the curve shifts to the left. *Side question: How do we know how much to move the curves? For purposes of learning how the models function, we do not know how much to move the curves. When measuring real world information, the models will be based on real world data. Changes in quantity demanded = price fluctuation.Changes in demand = change in one of these five factors. Factor 1: Change in incomeHaving more money to spend changes behaviors. When incomes increase while prices stay the same, buyers have more resources, demand increases. *Note: this does not happen with every product. When wages increase, people do not start consuming more of the same cheap goods they used because that's what they could afford - they replace them to higher quality goods. The products we consume when wages are low and discard when we have more money are called inferior goods and they do NOT follow the normal pattern of demand curve shifts. However, the products we choose when we can afford them and drop when we are poor are called normal goods, which do obey the law of demand. Example: How much money do you have to buy food? Students have little food budget and, when wanting choices other than the school food services, typically buy inexpensive, low quality products such as ramen noodles. As the students graduate from school, when most find jobs and start having independent incomes, they will also graduate into better quality food products, rather than just eating twice as much ramen.*Note* This concept feeds into others, and can lead to theory that guides policy decisions. Consider food deserts, "urban neighborhoods and rural towns without ready access to fresh,healthy, and affordable food." (http://apps.ams.usda.gov/fooddeserts/fooddeserts.aspx) Those with low incomes are unable to make the shift to normal goods because of the costs both in price and additional factors. A person without a car and living in a food desert could conceivablyspend the hours and money to travel to the nearest grocery store and purchase expensive fresh produce, coping with the hassle of carrying fragile groceries on public transportation - a tradeoff in time that could have been spent working or caring for family and household - or they can purchase cheap, shelf-stable foods at the local bodega. A diet of cheap processed foods definitely leads to health issues. Since this research came out, food deserts have become an issue of concern all over the U. S. Factor 2: Change in taste and preferencesWhen a product becomes popular, its utility increases, and the opposite is also true - when the fad passes, the product's utility decreases. Example: Lance Armstrong was immensely popular until it was discovered that he had been blood doping and taking steroids. He was stripped of his Tour de France medals and his popularity tanked. The market evidence of that taste change: Armstrong was dropped from multiple corporate sponsorships. ( http://www.cnbc.com/id/49462583# )Companies know that if they can make their products popular, they can get people to pay more for themas well as being able to sell more of them. Examples: SuperBowl ads sell at premium prices, and companies are willing to pay those huge amounts for a chance to raise their popularity with a captive audience - the one time that peopleactually want to watch ads, and that will create buzz for the following week.On January 1 of each year, purchases of gym equipment and dieting supplies soar, because thoseare the things on people's New Year's Resolutions. A month later, that taste spike has changed back to normal.Factor 3: Change in the price of related goodsSubstitutes Substitutes refers to goods that fill the same demand niche and are essentially the same to consumers. How do you choose if you have absolutely no preference? Really, it's a trick question: when you are ranking two equivalent products as completely equal, that choices doesn't really matter. You can flip a coin.Example: say that Coke and Pepsi are on sale at the same price. While some will have a preference, many will see them as equivalent. What you'll often see, though, is that the prices aren't the same. If the price of Pepsi rises, and it's all the same to you otherwise, you will buyCoke. When that happens, the quantity demanded of Pepsi will fall. At the same time, demand itself for Coke increases, and the curve shifts - EVEN THOUGH Coke has not changed at all. The move up Pepsi's existing demand curve


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