Number of
Buyers Prices of other
Price
goods
Income Determinants of Quality
Demand
Expectations
about future Supply?
Tastes
Increase in demand graph Decrease in demand graph
Price
• Price is the most important determinant of
demand.
• A “demand curve” plots combinations of
prices and quantity demanded.
• A shift in price causes a shift along the
demand curve
Increase in demand graph Decrease in demand graph
Price (continued)
• A change in price causes a shift along the
demand curve.
• A shift along the demand curve is referred
to as a “shift in the quantity demanded.”
• A shift in any other variable except price
causes a shift in the entire demand curve.
• A shift in the entire demand curve is
referred to as a “shift in demand.”
Increase in demand graph Decrease in demand graph
Income
• Changes in income can increase or decrease
demand.
• A good whose demand decreases with an
increase in income is called an “inferior
good.”
• A good whose demand increases with an
increase in income is called a “normal
good.”
Increase in demand graph Decrease in demand graph
Examples of changes in income
• An increase in income will reduce the
demand for ramen noodles or generic
products.
• An increase in income will increase the
demand for cars or clothing.
• An increase in income will significantly
increase the demand for air travel or
jewelry.
Increase in demand graph Decrease in demand graph
Prices of other goods
• Changes in the prices of other goods can
increase or decrease demand.
• A good that causes an increase in the
demand for another good when its price
increases is called a “substitute good.”
• A good that causes a decrease in the
demand for another good when its price
increases is called a “complementary good.”
Increase in demand graph Decrease in demand graph
Examples of changes in other
prices
• An increase in the price of peanut butter
will reduce the demand for jelly. Peanut
butter and jelly are complements.
• An increase in the price of Pepsi will
increase the demand for Coke. Pepsi and
Coke are substitutes.
Increase in demand graph Decrease in demand graph
Number of buyers
• An increase in the number of potential
buyers will increase the demand for the
good.
• For example, the demand for land increases
as the population increases.
• Similarly baseball tickets are generally
more expensive in larger cities.
Increase in demand graph Decrease in demand graph
Future Prices
• An increase in the expected future price of a
good increases current demand.
• A decrease in the expected future price of a
good decreases current demand.
• For example, when a good is temporarily
put on sale, people stock up on the good.
Increase in demand graph Decrease in demand graph
Tastes
• Demand curves can shift due to changes in
tastes over time.
• For example, demand for cereal may be
high in the morning but low at night.
• Similarly, demand for Saturday Night Fever
CDs may be high in the 1970s but low in
the 2000s.
Increase in demand graph Decrease in demand graph
Quality
• Demand curves can shift due to changes
quality.
• At a given price, demand for Giordano’s
pizza is higher than the demand for Papa
John’s.
• Similarly, CDs cost more than cassettes
because the music is of higher quality.
Increase in demand graph Decrease in demand graph
Does Supply Change Demand
Curve?
• Demand curves do not shift due to changes
supply.
• Shifts in supply change the equilibrium
price causing a shift along the demand
curve.
• Shifts in supply cause a change in the
quantity demanded not a shift in the demand
curve.
Increase in demand graph Decrease in demand graph
Graph of a supply shift
• An decrease in
supply shifts the
40
35 supply curve to
30
25 the left.
Price
20
15
10
• Equilibrium
5
0
price increases.
0 2000 4000 6000 8000 10000 12000 14000 • Quantity
Quantity
demanded
Old demand New supply Supply decreases.
Increase in demand graph Decrease in demand graph
Increase in demand
• An increase in
40
demand shifts the
35 demand curve to
30
25
the right.
Price
20
15 • Equilibrium price
10
5
increases.
0 • Quantity demanded
0 2000 4000 6000 8000 10000 12000 14000
Quantity
increases.
Old demand New demand Supply
Increase in demand graph Decrease in demand graph
Decrease in demand
• A decrease in
40 demand shifts
35
30 the demand
25
curve to the left.
Price
20
15
10
• Equilibrium
5 price falls.
0
0 2000 4000 6000 8000 10000 12000 14000 • Quantity
Quantity
demanded falls.
Old demand New demand Supply
Increase in demand graph Decrease in demand graph
