Demand 3 - Determinants of Demand (non-price) also known as Shifters of Demand

Determinants of Demand/ Shifters of Demand

Conversations welcome - Econowaugh on Facebook

The shift of the demand curve means the quantity demanded changes at every price level. Factors resulting in a shift of the demand curve are non-price factors of the good.  (or shifting happens with factors other than price.

Shifters of Demand

1. Numbers of Consumers (size of the market)
2. Income Normal Goods
3. Income Inferior Goods
4. Preferences 
5. Prices of Related Products:  Substitutes
6. Prices of Related Products: Complements
7. Expected Future Prices by Consumers
8. Expected Future Income by Consumers

Mjmfoodie doing it well:

1. Numbers of Consumers (size of the market)

Changes in the size of a market (the number of consumers) will have an effect. As the size of a market increases, demand for most products will tend to rise. As the size of the markets decreases, demand for most products will tend to rise.

Population Increase - energy and water

http://www.dailymotion.com/video/xa9tlx_population-increase-energy-and-wate_news

Population - http://www.econlib.org/library/Enc/Population.html

2. Income - Normal Goods

When income increases, the demand for normal goods will increase - shifts demand to the right

When income decreases, the demand for normal goods will decrease - shifts demand to the left

1995 AP Microeconomics Exam

Answer - (D) a normal good

2008 AP Microeconomics Exam

Answer - (B) reinforces the income effect

3. Income - Inferior Goods

When  income increases, the demand for inferior goods will decrease.

When income decreases, the demand for inferior goods will increase.

2000 AP Microeconomics Exam

Answer - (D) An increase in consumer income will decrease the demand for bologna.

4. Preferences 

Changes in taste and preferences affect demand. Preferences can be affected by consideration of health, weather, fashion trends, advertising etc. Ex. an increase in awareness of overweight problems will lower the demand for red meat and pastries. (Possibly)

Our preferences are influenced by all types of information. (sometimes it's difficult to know who to believe)


1995 AP Microeconomics Exam

Answer - (A) An increase in the demand for air travel. ( People's preference for flight over cars or bus travel increase the demand for aircraft mechanics.)

1995 AP Microeconomics Exam

Answer - (B)  The demand curve will shift to the left, decreasing the price of beef.

2005 AP Microeconomics Exam

Answer - (B) The price of artichokes will increase. (preference for eating artichokes will increase raising demand)

5. Prices of Related Products:  Substitutes

Substitutes exist for all of our wants and needs. Think of the products you have in your shower and the differing shampoos and soaps that exist in the grocery store. If the price of your favorite shampoo doubles you might decide to substitute a cheaper brand. 

2000 AP Microeconomics Exam

Answer (A) An increase in the price of pizza, a substitute for hamburgers.

6. Prices of Related Products: Compliments

Two goods are considered compliments if they are consumed together. Examples would include, peanut butter and jelly, toast and jam, hamburgers and french fries (chips), toothpaste and toothbrushes, coffee and sugar. 

If the price of peanut butter skyrockets then we could expect the price of jelly to fall as the increase in the price of peanut butter will cause its Qd to fall which in turn will cause the demand for jelly to fall.

2000 AP Microeconomics Exam

Answer - (D) The release of three summer movies. (In essence more movies bring more people                           to the movies and when people come to the movies they like to eat popcorn.)

1995 AP Microeconomics Exam

Answer - (E) complementary goods

2005 AP Microeconomics Exams

Answer - (B) An increase in the price of potatoes, if potatoes and beef are complementary                                  goods.

2005 AP Microeconomics Exam

Answer - (B) X & Y are complementary. (This problem is easier (for me) if I add real products for the variables X &Y. )

7. Expected Future Prices by Consumers

If you expect the price of that dress to go on sale next week you will wait until next week to buy it. If you expect that dress to increase in price next week you will usually go out and buy it now. 

Expectations are powerful incentives,,, think of the milk section before a big storm hits. 

8. Expected Future Income of Consumers

If you expect to get a big raise in the next month, or a big bonus you might choose to spend know knowing that you will be able to pay for your purchases later. 

Know these Concepts

Reffonomics - website with interactive determinants of demand.

http://www.reffonomics.com/TRB/chapter4/demand1.swf

http://www.reffonomics.com/TRB/chapter4/demandinteractivechart.swf

Welker and the Determinantes of Demand - Video

https://www.youtube.com/watch?v=FfvPwmqa_A0&src_vid=hqKOr6H_YFE&feature=iv&annotation_id=annotation_154419

Demand 2 - Why does the Demand Curve Slope Downward

Why does the Demand Curve Slope Downward

Conversations welcome - Econowaugh on Facebook

Pajholden doing it well.

There are 3 reasons that the Demand Curve slopes downward.

1. Substitution Effect
2. Income Effect
3. Law of Diminishing Marginal Utility

Substitution Effect:

Definition - If the price of X increases then all other goods automatically become relatively cheaper                       so consumers will tend to substitute other goods in place of X.

                    (If the price of beef rises then I will switch to chicken, or pork or fish)

                    or - as the price of a good X decreases, consumers switch from other higher priced goods                            to the lower priced good X. (As the price of beef decreases I will switch from                                      chicken, pork or fish back to beef) 

Income Effect:

Definition - When the price of good X increases, consumers' real income is lowered so the quantity of                     good X they can afford is lowered. (When things get more expensive its harder to make                       ends meet)

                   or - When the price of a good decreases, the quantity demanded now increases because                               consumers now have more real income to spend. (When the price of a good                                           decreases we can buy more of it)

Law of Diminishing Marginal Utility:

Definition - As we consume additional units of something, the satisfaction (Utility) we derive for each additional unit (marginal unit) grows smaller. (diminishes).

Law of Diminishing Marginal Utility - done well by mjmfoodie

Reffonomics - Why the Demand Curve slopes down. - Interactive

http://www.reffonomics.com/TRB/chapter4/SlopeofDemandCurveFINAL1.swf

Demand 1 - Demand & Quantity Demand

Demand

Demand - definition - the willingness and the ability to purchase a quantity of a good or service at a                                       certain price over a period of time

Law of Demand - an increase in price leads to a decrease in Quantity Demand (Qd).

Introduction to Demand - by mjmfoodie.

Watch the video and then see if you can answer this AP exam question,,

2000 AP Exam Microeconomics - 

Answer - (C) In the past several months, as the price of compact disk players has decreased the quantity of compact disk players sold has increased. ( Doesn't this make sense, price goes down more is bought/sold)

* In a demand curve the price and the Quantity Demanded have an inverse relationship... 

What does that mean? 

It means that as the price of a good goes up the quantity demanded goes down. Conversely, if the price goes down the quantity demanded goes up.

Say it again,,, (Price goes up less is bought,, Price goes down more is bought.)  Simple right?

Quantity Demanded is not Demand (Say it over & Over)

Please watch the video below..

Quantity Demand is a movement up or down the curve. 

Quantity Demand is driven by a Price Change.

I'm going write this again,,, Quantity Demanded is driven by price. Look at the curve above. When a cake costs

• at $9 a cake the quantity demanded is 1 cake,
• at $8 a cake the quantity demanded is 2 cakes, 
• at $7 a cake the quantity demanded is 3 cakes,
• at $6 a cake the quantity demanded is 4 cakes,
• etc etc, all the way until at a price of $0 the quantity demanded will be 10 cakes.

All students have an issue with the difference between a movement on the curve and a shift of the curve. 

Take a moment and go to this website and play with the interactive graphics.

http://www.reffonomics.com/TRB/chapter4/quantitydemanded.swf

Always good to watch a video by Welker -

PPC 2

Production Possibility Curve

Ok, last post we talked about the PPC and what some of the points mean. Lets look at the curve again and add some new points.

2008 AP Microeconomic Exam

Here we have question 1 from the 2008 AP Central released study test. It shows a bowed-out PPC curve with points on the curve, inside the curve, and outside the curve.

Lets take answer (E), It states that the economy is not producing at its potential, since it is not producing at point D.

• Points outside the curve - Answer Choice (E)/ Point D , (yes I know it's confusing but I didn't design the test) are unattainable because they are beyond what is presently possible given the country's scarce resources.  - Think of potential as potential output which is a level of output that can be achieved using existing levels of technology, resources and with full employment,, in essence,, when you read potential, think on the curve. -- The answer can't be E as points outside the curve are unattainable.
• Points inside the curve - Answer Choice (D)/ Point E, points inside the curve are attainable but inefficient as scarce resources are not being used. (Usually points inside the curve are representations of unemployment.) The answer can not be D because the country can produce at point E.
• Points on the curve - Answer Choice (C)/ Point A,B & C, Points on the curve are attainable and efficient combinations as there is no waste of scarce resources. Think full employment, all machines and equipment are being utilized, all resources are being used along with the most innovative technologies. The answer can not be C as at point C there is no butter being made, just machines. (tricky bastards)
• Answer Choice (B) - The opportunity cost of producing more machines is constant. Due to the fact that the PPC curve is bowed-out lets us know that the opportunity cost is not constant. In this case we know that as we move toward the ends of the curve we give up more and more of the other good,,, opportunity costs increase as we move to the edges of the curve.
• Answer Choice (A) It is true that if our society has chosen to produce at point C on the curve then all resources are being used efficiently and since it is on the curve we know that it is attainable.

Shifting of the PPC Curve 

• Outward shifts of the Curve

An outward shift of the PPC reflects growth as combinations of output previously unattainable now become attainable. 

1995 AP Microeconomics Exam

Answer - Economic growth on the PPC is depicted by a rightward shift of the curve (A).

How can this happen?

The discovery of new natural resources such as shale gas or oil.

Immigration or an increasing of the workforce

Introduction of new technology or advances in the techniques of production or an increase in the quality of labour.

Trade

Example 1 - New stock of resources are found -  OIL is Found in North Dakota 

Example 2 - New Stock of resources such as an increase in the Labor Force

1995 Ap Microeconomic Exam

Answer - An outward shift in the PPC can be caused by (B) the labor force.

Example 3 - Resources Found - Water in Africa

http://www.bbc.com/news/science-environment-24049800

Example 4 - Trade between Korea and Canada

http://www.theglobeandmail.com/news/politics/with-south-korean-deal-canada-securesfree-trade-foothold-in-asia/article17422168/

2000 AP Microeconomics Exam

Answer - A country can consume beyond its PPC when it (A) trades with other countries thus taking advantage of differing opportunity costs.

Podcast - Paul Romer, Stanford University professor and Hoover Institution Senior Fellow talks with EconTalk host Russ Roberts about growth, China, innovation, and the role of human capital. Also discussed are ideas in creating growth, the idea that ideas allow for increasing returns, and intellectual property and how it should be treated. This 75 minute podcast is a wonderful introduction to thinking about what creates and sustains our standard of living in the modern world.
http://www.econtalk.org/archives/2007/08/romer_on_growth.html

PPC 1

Production Possibility Curve, Production Possibility Frontier or (PPC/PPF),

Definition - shows the the maximum amount of good Y an economy is able to produce for each amount of X it chooses to produce if it fully and efficiently employs all of its scarce resources with its given level of technology.

Assumptions or ground rules of the PPC/PPF

• two goods or services only - clothing/food, butter/guns, capital goods/consumer goods
• Full employment - If your on the line there is full employment (B & C) below.
• Constant technology/resources/population/work force

What does it look like,

This represents a society that only produces two goods clothing and food. Obviously if they only produce food they will have no resources to produce clothing (bit awkward). If they only produce clothing they will starve. Society therefore must chose (make a trade-off) to produce some combination of the two goods. 

If society is producing at point B (above) it's referred to as being attainable and efficient. 

• Attainable - because by using all resources available and with full employment society can produce this amount of goods.
• Efficient - because it is impossible (with this combination of goods) to produce more of one good without decreasing the production of the other. 

If society is producing at point C (above) it's also referred to as being attainable and efficient. Yet something has changed,, in moving from B to C we have given up a bit of clothing and produced a bit more food.

Example - 1995 AP Microeconomic Exam

In moving from point B to point C we have produced less of (units of good Y) and more of (units of good X) The question above asks,, what is the opportunity cost of moving from B to C. 

• Opportunity Cost - The value of the next best alternative sacrificed. (what is given up)

Answer - In question 17, when moving from point B to point C, what is given up, is the amount of good Y from H to G of good Y. So (B) HG units of good Y is the answer.

Example 2 - 2000 AP Microeconomics Exam

OK, here we are using a table but the question is the same. What is the opportunity cost (what is given up) if society increases production of good Y from 0 to 200.

Answer - To produce 200 units of good Y  we can only produce  980 units of good X,, so to move from 0 to 200 of good Y we must produce less of good X. We simply look across the table from 200 of good Y to the matching number of 980 units of good X. In increasing our production of good Y by 200 we have decreased our production of good X by 20, (1,000 - 980 = 20). So (D) 20 units of X is the final answer.

Example 3 - 2005 AP Microeconomics Exam

Again, the question is asking what is being given up (opportunity cost). If we are producing at point X of Capital Goods (50) then we are also producing 3 Consumer goods. 

Answer - To move from producing 3 (point X) Consumer goods to 4 Consumer goods means that we must give up some Capital goods. It shows (dotted line) that at 4 Consumer goods we can only produce 30 Capital goods. So in moving from 3 units of Consumer goods to 4 Units of Consumer goods we move from 50 units to 30 units of Capital goods, we have given up 20 Capital goods. 

Good video's to watch

Mjmfoodie - 

https://www.youtube.com/watch?v=JCEWQ_cafUs&list=PLF2A3693D8481F442

https://www.youtube.com/watch?v=PSU-_n81QT0&list=PLF2A3693D8481F442&index=8

https://www.youtube.com/watch?v=ApWWs_sZQQg&list=PLF2A3693D8481F442&index=9

pajholden - 

https://www.youtube.com/watch?v=a5rxIY46J7s

welker - 

https://www.youtube.com/watch?v=kmjzgB_tUJ8

More tomorrow,

Waugh