The income effect changes demand by allowing consumers to purchase goods they wouldn’t normally purchase due to a
lack of affordability.
The Substitution Effect
When Lauren goes to the grocery store, she typically buys the name-brand cereal; however, this time Lauren is forced to
buy the generic brand because the price of the name-brand cereal has climbed too high for her budget. This is an example
of Lauren substituting the name brand for the generic brand. The substitution effectoccurs because the price of the
desired item is too expensive, so consumers find a close alternative to the initial item.
The Price of Complementary Goods
Complementary goodsare goods that are used in tandem with other goods. You can’t play a DVD movie without a
DVD player, so these are complementary goods. Hot dogs and buns, peanut butter and jelly, and tires and cars are more
examples of complementary goods. If the price of one good rises (the DVD player, for example), then the demand for
the complementary good (DVD movies) will fall. If the price for hot dogs falls, then theoretically the demand for buns
will rise. It is important to focus first on the price of the item and then on the demand of the complementary item.
Population
If an increase of immigration were to occur in a country, then the demand for any good or service would increase. If a
decrease in population occurs (due to illness or people leaving the country), then the demand for any good or service
would decrease.
Consumer Expectations
Expectations of future events affect the current demand for a good or service. If the price for hot dogs is expected to
rise in the near future, then the demand for hot dogs will increase now. If the price for hot dogs is expected to drop in
the near future, then the demand for hot dogs will decrease now.
Note:An increase in demand is demonstrated on a graph by a shift to the right, while a decrease in demand is indicated
by a shift to the left.
Mini-Review
- Which one of the following is not a determinant of demand?
A. Taste or preference
B. Income
C. Expenditures
D. Consumer expectations
E. Population - When demand increases, what happens to a demand curve?
A. It shifts left.
B. It shifts right.
C. No movement occurs.
D. The quantity does not change.
E. It becomes positively sloped.
Supply and Demand