Muesli Hetero and Fondu Shadow Aggregate Demand Curves and Shifting Demand Punchline Aggregate demand curves are not the same as the sum of individual curves What happens to the amount purchased when prices rise Orthodox theory says amount falls to equate price with marginal utility Alternative theory says that this is true only for isolated individuals In a group the aggregate demand may rise with higher prices Big ideas Individuals buy less with higher prices to find Q where individual MU new higher price In social context MU is influenced by others At higher prices MU may rise with pleasure of impressing others Veblen effects or because higher prices signal higher quality Price signals MU may increase with pleasure of joining others stampedes and fads or convenience of fitting in network economies Changes in preferences income price of complements or substitutes change amount bought at any price by moving demand curve Orthodox approach assumes perfect information and asocial behavior We judge based on how others behave If they are buying it at a high price it must be good If it is cheap it must be bad We buy to impress If it is expensive our neighbors will notice If it is cheap they will also notice We buy to fit in or to distinguish ourselves We dress like our friends but different We consume to network with them or to be special How do we react when prices rise Orthodox MU and downward sloping demand curves Real World Social demand We buy less until our MU equals the new higher price Sometimes we buy more when others want something higher prices signal status It depends on whether we consume as individuals or as part of a group Do you shop for yourself Then why do some many of us dress alike Men dress like men women like women If dresses fell in price would men wear them Why we care what other people do Social sources of utility from consumption Status Showing off Veblen effects Bonding Being one with your group Stampedes If others buy it that means it is a good product Price signals If others buy it I will fit in if I have it also Network effects What was she thinking Did she think that an expensive dress like this must be beautiful Or was she showing off that she has money to waste Veblen Effects after Thorstein Veblen 1857 1929 Veblen was different He had many affairs with married women and with his female students In The Theory of the Leisure Class 1899 he said that we buy to impress conspicuous consumption Veblen argues that we consume to impress others We buy things to signal to others that we are successful Adam Smith would have agreed Does this explain why some people wear such uncomfortable clothes Higher prices can give our consumption status I rate because I have money to spend Or whatever Sometimes we buy what others buy to join the crowd Status is in doing what others do but a little better Does this explain why men don t wear dresses but women do Some things help us to fit in Sometimes we follow the crowd because we think they know better Prices tell us how others rate a product Sometimes we value their judgment How else do we know if we are buying a BMW or a lemon How do we know what we are buying A study using brain imaging found people like wine better if they believe it is expensive It was hard to drink wine in this Higher prices validate our choices True or false If something is expensive it is better True or false If something becomes more expensive you buy less If everyone else starts to buy something how do we react Do we stop buying it because the price has gone up Or do we buy more because we are now part of a larger network of people who consume the same thing Do you want to be the only one with a metric ruler How would you react if prices rise Buy less because of marginal utility Buy more to show off that we can Buy more because the higher price signals that this is a good and desired product Buy more because this signals that others are buying it and we want to fit in Why does anyone use Microsoft Sometimes we want what others have because it is convenient to be part of a network It can be easier to communicate with those who consume like us It is easier to get spare parts And help Maybe not enough Maybe aggregate demand curves look like this Higher prices go with higher demand because prices signal quality and status Even if there is diminishing MU Moving demand curves Demand curves move when the amount purchased at any price changes Change in demand may reflect changes in preferences in income or in the price of substitutes or the price of complements Demand may change because of social circumstances social infrastructure or the strength of networks and fads When demand curves move out More will be purchased at any price or consumers will pay more for the same amount P Q When demand curves move in Less will be purchased at any price or consumers will pay Less for the same amount P Q Examples of moving demand curves Changing preferences Stuff that people don t want anymore Stuff that people now really want VHS tape players Prices have fallen but people still won t buy You can get one for free at the town landfill Hybrid cars Despite rising prices people are buying more What moves demand curves I Preferences People younger sisters suddenly don t like Britney they like Hannah Montana instead OUT IN The most in No longer in or out Can you explain taste Is taste a matter of individual preference Why do the French drink wine Why do Germans drink beer Why do the French speak French Why does anyone speak Basque Why do men wear ties in the summer Why do women wear dresses in winter Why do women wear pantyhose What moves demand curves 2 Changes in income China and India are getting rich enough to buy oil increasing world demand What moves demand curves 3 Changes in the price of substitutes and complements A complement is consumed with something Which is a complement to college 1 Beer 2 Textbooks 3 No doz coffee 4 All of the above 5 None of the above When the price of a complement rises demand falls What is the effect of gas prices on demand for big cars Does demand 1 Rise 2 Fall P Q A substitute is consumed instead of something When the Which is a substitute for college 1 The Army 2 Jail 3 An apprenticeship 4 Working at MacDonalds P Substitutes price of pot rises demand for beer increases Beer market Q Social factors move demand curves Fads social infrastructure and networks Friends introduced me to The Pretenders in the early 1980s We had fun listening