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predicted to grow by 42 seats. Thus, we confirm that there is a 42-unit right-

ward shift in the demand curve from old to new demand.

Another way to think about the effect of the increase in regional income

is to write down the equations for the market-clearing price for the old and

new demand curves. These are

[3.6]

Thus, if your airline seeks to sell the same number of seats a year from now

that it does today, it can do so while raising the coach ticket price by $21 (the

difference between 311 and 290). To see this in Figure 3.1, fix the quantity and

read the higher price off the new demand curve.

General Determinants of Demand

The example of demand for air travel is representative of the results found for

most goods or services. Obviously, the good’s own priceis a key determinant of

demand. (We will say much more about price later in the chapter.) Close

behind in importance is the level of incomeof the potential purchasers of the

good or service. A basic definition is useful in describing the effect of income

on sales: A product is called a normal goodif an increase in income raises its

sales. In our example, air travel is a normal good. For any normal good, sales

vary directly with income; that is, the coefficient on income in the demand

equation is positive. As an empirical matter, most goods and services are nor-

mal. Any increase in consumer income is spread over a wide variety of goods

and services. (Of course, the extra spending on a given good may be small or

even nearly zero.) Likewise, when income is reduced in an economy that is

experiencing a recession, demand falls across the spectrum of normal goods.

For a small category of goods (such as certain food staples), an increase in

income causes a reduction in spending. These are termed inferior goods.For

instance, an individual of moderate means may regularly consume a large quan-

tity of beans, rice, and ground meat. But, after experiencing an increase in

income, the individual can better afford other foods and therefore reduces his

consumption of the old staples.

A third set of factors affecting demand are the prices of substituteand com-

plementarygoods. As the term suggests, a substitute goodcompetes with and

can substitute for the good in question. In the airline example, travel on one

airline serving the same intercity route is a very close substitute for travel on the

other. Accordingly, an increase in the price of the substitute good or service causes an

increase in demand for the good in question(by making it relatively more attractive

to purchase). Note that substitution in demand can occur at many levels. For

P 311 Q/2 (new)

P 290 Q/2 (old)

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