Demand+include+what+is+a+demand+curve+and+what+shifts+a+demand+curve


 * Demand**

Definition:

The demand for a particular product is the quantity that buyers are willing to purchase at various prices (Pride pg 17). As the price of a product increases, holding other variables constant, individuals will demand less of that product. On the other hand, the quantity demanded of a product will increase as the price decreases since individuals are willing to buy more of the product at the decreased price. This concept is called //law of demand.//

The quantity demand is typically viewed moving in the opposite direction as the price of the quantity being supplied. This would mean that when price increases the demand for the quantity would decrease, and conversely if the price decreases the demand for the quantity would increase. This assumes that the society behaves in a rational manner, which means they would demand more of an item as the price decreases and less of an item when the price increases. Based on this notion, the demand curve is a downward sloping.



Demand Shifters:

There are also additional factors which can impact the demand. When any variable other than its own price affects demand, it effect will be shown as a shift in the demand curve (Folland pg. 25). These are called //demand shifters//. A few common demand shifters are listed below:


 * Prices of Related Goods
 * If the price of a related good changes, it can affect the demand curve. This is based on a human response which identifies certain products to be either a complementary or substitute goods.
 * Complementary goods are identified as products which are viewed as positively associated with one another. If the demand for a product increases, one would believe that the complementary goods of that product would also have an increase in demand. However, if the price of a good increases, one would also need to assume that the demand of there complementary products would decrease.
 * Example- A price increase in cereal would lead to a decreased demand for milk.
 * Substitute products are viewed as products which can be purchased in lieu of the other product. If the price for the other product increases, the demand for the substitute product will increase. Hence, if the price for the other product decreases, the demand for the substitute product will increase. This is because individuals are willing to replace the original product with the substitute product after the increased price of the original product.
 * Example- The price of liquid soap increases, the demand for bar soap will increase.


 * Income
 * The quantity of products which individuals are willing to purchase can be based on their income. A demand curve shift can either be increased or decreased based on the type of product.
 * Normal Goods- Products whose demand will move in relation with the change in income. These products will have an increase in demand with an increase in income and a reduction in demand with a reduction of income.
 * Example- An increase in income will increase the demand for theater tickets.
 * Inferior Goods- Products whose demand is inversely affected by a change in income. These products have a reduction in demand after an increase in income, and an increase in demand with a reduction in income.
 * Example- An increase in income will decrease the demand for ‘second-hand’ clothing (Goodwill).


 * Advertising
 * As more money is spent on advertising, there will be an increase in demand for the product as more individuals will be aware of the product and its benefits. If there is an increase in advertising, then the demand curve should shift to the right.
 * Example- LSN corporation starts running advertisements in the newspaper on their new product which the general population becomes aware of and starts to purchase the product.


 * Market Size
 * If the number of consumers in the market for a product increases, the demand for the product will increase (EconED Link).
 * Example- if a neighborhood is developed near a supermarket, the demand for the products at the supermarket will increase.


 * Expectations of a Price Change
 * When individuals expect price changes, they will make purchasing decisions based on this information. If the individuals feels the price will increase in a few days, they will demand more of the product now at the cheaper price. This would shift the demand curve to the right.
 * Example- A news report predicting higher prices in the future can increase the current demand as customers increase the quantity they purchase in anticipation of the price change (NetMBA).

Below is a visual representation of the effects of Demand Shifters.



Questions:

1) According to the law of demand, as price increases, the quantity demanded will be expected to: a. Increase b. Decrease c. Stay the Same d. Depends on the Good

2) The only factor which affects the demand of a good is the price of this good. a. True b. False

3) Assuming that baseball bats and baseball gloves are complimentary goods, if the price of baseball bats increase, one would assume that the demand for baseball gloves would: a. Increase b. Decrease c. Stay the Same d. Need Additional Information

4) If an individual reads an article about how the price of plasma television sets should decrease by Christmas, the individuals current demand curve for plasma television sets should: a. Shift Right b. Shift Left c. Stay the Same

5) When the price of a product increase, the demand curve for this product will shift left. a. True b. False

Answers

1. The correct answer is (b) decrease. The law of demand states that ‘price and quantity demanded are inversely related’ (Baye pg. 37). 2. The correct answer is (b) False. There are many factors, such as demand shifters, which affect the price of a product. 3. The correct answer is (b) decrease. Since the products are complimentary, if the price of a good increase, it will decrease the demand of its complimentary goods. Consumers who typically buy items in connection with one another will buy less of both items if the price increases for one of these products. 4. The correct answer is (b) shift left. The individual will have an expectation that the price will decrease in the coming months and demand less of the product now at the higher price. 5. The correct answer is (b) False. The demand curve for this product will not shift at all. The quantity demanded will decrease and move left on the demand curve.

References:

Baye, Michael R. __Managerial Economics and Business Strategy__. New York: McGraw-Hill Irwin, 2006.

__EconEd Link.__ 2007. National Council for Economic Education. Viewed 13 Sept 2007. 

Folland, Sherman, Allen C. Goodman, and Miron Stano. __The Economics of Health and Health Care.__ Upper Saddle River, NJ: Pearson Education, 2004.

__NetMBA Business Knowledge Center__. 2002. Internet Center for Management and Business Administration, Inc. Viewed 13 Sept 2007. 

Pride, William A., Robert J. Hughes, and Jack R. Kapour. __Business__. Boston: Houghton Mifflin Custom Publishing, 2005.