# The Demand Curve Shifts

Instructor: Tyler Cowen, George Mason University

How do increases or decreases in demand affect the demand curve? An increase in demand means an increase in the quantity demanded at every price. Similarly, a

How do increases or decreases in demand affect the demand curve? An increase in demand means an increase in the quantity demanded at every price. Similarly, a decrease in demand means a decrease in the quantity demanded at every price.

This video takes a look at some important factors that shift the demand curve, such as changes in population, changes in income, prices of substitutes, and changes in taste. We’ll look at real-world scenarios that cause a change in demand — like how the demand for batteries increases when a hurricane is expected, how our demand for inferior goods decreases when our income increases, and how the demand for hot dogs increases when the price of the complement, hot dog buns, decreases.

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## Transcript

In our previous videos, we covered the basics of the demand curve. Now we get to dive into what happens when the demand curve shifts due to increases or decreases in market demand.

Remember that a demand curve is a function which shows the quantity demanded at different prices. And the quantity demanded is the quantity that buyers are willing and able to purchase at a particular price. We said last time that an increase in demand means a shifting out of the demand curve, a movement toward the northeast away from the origin. Now let's look at that more closely.

An increase in demand means there's a greater quantity demanded at every price. For example, on the old demand curve at a price of \$25, people were willing and able to purchase 70 units. On the new demand curve at that same price of \$25, people are now willing and able to purchase 80 units. An increase in demand is a greater quantity demanded at the same price.

We can also read an increase in demand using the vertical method. What that means is that in every quantity, there is a greater willingness to pay for that quantity. For example, for the 70th unit, people were willing to pay \$25 for that unit. Now with the new demand curve, people are willing to pay \$50 for that unit. That's a greater willingness to pay for the same quantity and this is what an increase in demand means.

To review, because this is important, an increase in demand means an increase in the quantity demanded at every price, or equivalently, it means an increase in the maximum willingness to pay for a given quantity. What would cause an increase in demand? The answer is anything that increases the quantity demanded at a given price or that which increases the maximum willingness to pay for a given quantity.

For instance, can you think of some factors which would make consumers willing to pay more for a good? Can you think of a factor which would make consumers want a greater quantity at a fixed price? Those are the types of factors which are going to shift the demand curve. Now in a minute, I'm going to give you a list of such possible factors but I don't want you to memorize this list. Instead I want you to understand what an increase in demand means. If you understand that, then you'll always be able to recreate such a list on the fly.

Now, here are some examples of important demand shifters. For instance, changes in income and changes in population. Can you see, for example, how an increase in income might cause people to be willing to pay more for a given quantity of a good? Or might cause them to want more of that good at a particular price? How about changes in population? More people might increase the quantity demanded at a particular price because there are more potential customers. Fewer people in the world could decrease the quantity demanded.

How about some other factors which might shift demand curves? Well, there are prices of substitutes, prices of complements, expectations, and changes in taste. These are all a little bit trickier but I'll go through them all in a moment. I just wanted for now to give you a sense of some of the other things which might also shift market demand.

Of course, everything I've said about an increase in demand applies just the same but in reverse for a decrease in demand. A decrease in demand is a shift inwards of the curve toward the origin. It again could be read in two ways. It means that in any given price there is less quantity demanded at that price. Similarly, for any given quantity there is a lower willingness to pay for the same quantity. A decrease in demand means a decrease in the quantity demanded at every given price, or equivalently, a decrease in the maximum willingness to pay for each given quantity.

What might cause a decrease in demand? Again I'm going to belabor this point a little bit, but a decrease in demand is anything that decreases the quantity demanded at a given price or that decreases the maximum willingness to pay for a given quantity. If you keep in mind that is what a decrease in demand means, then you'll always be able to come up with factors which would decrease market demand.

Let's look in more detail at some of the demand shifters beginning with income. The effect of changes income on demand depends on the nature of the good in question. For more goods, when your income goes up, you demand more of that good. Imagine that you're a poor student right now, but soon you'll graduate and get a high paying job. When you get that high paying job, when your income goes up, you're probably going to demand more automobiles, more housing, and more fine dining. These are all called normal goods because the demand for them goes up when incomes go up. And of course the demand for them goes down when incomes go down.

There are also goods, however, for which when your income goes up your demand for them actually goes down. Again when I was a poor student for instance, I actually sometimes went to McDonald's to buy a cheeseburger because it was cheap. When my income went up later, I ate at McDonald's less often and ate at better restaurants, which of course cost more. I haven't actually eaten at McDonald's for many years. An inferior good is one which when your income goes up the demand for it goes down, and vice versa. For instance, think about soup. Soup is a cheap and easy meal. So during a recession, the demand for soup may well go up. During boom times, the demand for soup may well go down.

Now let's test your knowledge. I suggest you get a pencil and also a piece of paper. Put down two demand curves. Now we're going to think about the demand for Hamburger Helper and we're going to think about it in two different situations, namely during a boom and during a recession. Here's our demand for Hamburger Helper. What is going to happen to this demand when the economy goes into a boom, when people's incomes go up? Now draw the new demand curve. What's that new demand curve going to look like? In a boom, the demand for Hamburger Helper is going to decrease because Hamburger Helper is an inferior good so we get a decrease in demand.

What about in a recession? Of course in a recession we get the opposite. In a recession, when incomes are going down the demand for Hamburger Helper is going up.

Here's another demand shifter, namely population. As the population of an economy changes, the number of potential buyers of a particular good also changes. For instance, what happens to the demand for diapers in Russia as birth rates drop? Well, that demand is going to decrease. In the United States, as you probably know the baby boomers are getting older so having many more elderly individuals in the population. Which products will increase in demand as the American population gets older? Well, think about that for a moment. Here are a few possible examples.

As the number of elderly in the United States goes up we would expect an increase in the demand for cancer drugs, for instance. Indeed, as the population has gotten older, pharmaceutical firms have invested more in research and development for producing drugs for older people. We expect also as people get older, the demand for retirement communities goes up, perhaps even the demand for golf.

How would we do this on the demand curve? Well here’s an old demand curve, but as the population gets older the demand for these products, cancer drugs, retirement communities, and golf equipment, well that goes up so this curve shifts away from the origin and up to the right.

Here's another demand shifter, the price of substitutes. Two goods are substitutes if an increase in the price of one good leads to an increase in demand for the other good as well. For example, suppose that the price of Nike shoes goes up. Well, that is going to increase the demand for Reebok shoes and vice versa. Suppose instead that the price of Nike shoes goes down, that is going to decrease the demand for Reeboks, as people switch from Reeboks to the now cheaper good, Nike.

Another example. What happens to the demand for iTunes if songs on Spotify, a competitor, become cheaper? If Spotify is cheaper, that's going to decrease the demand for iTunes.

Another important demand shifter is the price of complements. Complements are goods which tend to go together well. Think, for instance, of hotdogs and hotdog buns. Technically, two goods are complements if an increase in the price of one of those goods leads to a decrease in the demand for the other. Suppose, for instance, that the price of hotdogs goes up. That means fewer people are going to buy hotdogs. That means that demand for hotdog buns is going to decrease as well, and vice versa of course. Again, if the price of hotdog buns goes down, people are going to want to buy more buns. But then they're also going to want to buy more of the complement of hotdogs. So the demand for hotdogs will go up when the price of the complement, hotdog buns, goes down.

Here's another example. What happens to the demand for sport utility vehicles when gasoline gets more expensive? Cars and gasoline or sport utility vehicles and gasoline, they're complements. When you want one, you also want the other. So if gasoline gets more expensive, that is going to decrease the demand for sport utility vehicles.

Another important demand shifter is expectations. It can be expectations of events or of prices. In particular, if people expect the price of a good to be higher in the future, that is going to tend to increase demand today. Consumers will adjust their current spending in anticipation of what is going to happen to future prices in order to obtain the lowest possible price by buying more today.

For example, imagine you hear there's going to be a hurricane. If the hurricane hits, you expect the price of batteries is going to go way up or perhaps it's going to be very difficult to even get any batteries at all. That's going to increase the demand for batteries today. Something in the future, that is this expectation of a future event, can change the demand today. Similarly, if people expect that the price of the Xbox 360 is going to drop right before Christmas, well then sales in November will go down. Apple has to deal with this problem all of the time. Each time people expect a new iPhone model, they stop buying the current version of the iPhone. So Apple doesn't want anyone to know when a new iPhone is going to be coming out because otherwise in the meantime, the sales of the current product will drop.

Taste is an important demand shifter and tastes change all the time. Tastes differ among consumers and they also differ overtime because of seasonal changes or fashion or fads. For instance, what happens to the demand for boots in October? What happens to the demand for swimsuits in June? What happens to the demand for sunscreen during the summer? What happens when everyone thinks that the Atkins diet is going to cause them to lose weight? Let's take a closer look at that one.

The Atkins diet, if you recall, was a diet which said that carbohydrates make you fat, so the way to lose weight was to consume more protein, more red meat, in particular. What do you think was the effect of the Atkins diet on the demand for red meat? It increased that demand. What about the effect of the diet on the demand for bread? It decreased the demand for bread. By the way, Atkins later had a heart attack and after he had this heart attack, the demand for the Atkins diet went down so these two factors went into reverse.

The final point for this lecture is a terminological one and this will become more clear after we've covered more of supply. I'll come back to that, but for now I just want to give you a heads up.

Unfortunately, economists sometimes use similar words for different concepts. In particular, a change in the quantity demanded is not the same as a change in demand. A change in the quantity demanded is about a movement along a fixed demand curve due to a change in price. For instance, as you recall, we can say that at a price of \$10, the quantity demanded is 200. When the price changes and we move along this curve, so then when the price falls to \$5, we see that the quantity demanded is 420 units. That's a change in quantity demanded. It's a movement along this fixed curve as we just saw. A change in demand is a non-price induced change. It's a shift of the entire demand curve. A change in demand, such as an increase in demand. is again a shift in this curve. So keep these two differences in mind. Change in quantity demanded is a movement along a curve due to changes in price. A change in demand is a shift of the entire demand curve due to changes in income or population or taste or any of the other factors other than price that we've talked about.

Anyway, those are the points for now on demand curves. Thanks.

Yes, certainly true.

The demand curve shiifts to the right, whereas the supply curve remains unchanged. That would result in an increase in the equilibrium price and equilibrium quantity.