Episode 12: Change in Demand vs Change in Quantity Demanded

Summary

This script explains the concept of demand in economics, emphasizing that an increase in price does not change the demand curve itself but rather results in a movement along it, indicating a decrease in quantity demanded. Factors that can shift the demand curve include changes in mortgage rates, related markets, income levels, consumer expectations, and the prices of complementary goods. It distinguishes between a change in quantity demanded, which is a movement along the demand curve due to price changes, and a change in demand, which is a shift of the entire curve due to factors other than the product's price.

Takeaways

• 📈 The demand curve represents the relationship between price and quantity demanded, showing an inverse relationship.
• 📉 An increase in price results in a decrease in quantity demanded, but does not change the demand curve itself; it's a movement along the curve.
• 🏠 Changes in housing prices do not shift the demand curve; they cause a movement along the existing demand curve.
• 💵 Changes in mortgage rates can shift the demand curve for housing, as they affect the willingness to purchase at all price levels.
• 🔗 The relationship between related markets, such as apartments and houses, can cause shifts in demand when prices in one market change.
• 💼 Changes in income can lead to shifts in demand for normal goods, but may decrease demand for inferior goods as consumers opt for higher quality alternatives.
• 🏢 Expectations about future prices, such as in the housing market, can cause shifts in demand as buyers rush to purchase in anticipation of price increases.
• ⛽ The price of complementary goods, like gas for cars, can shift the demand for the related product, as seen with the increase in oil prices affecting car demand.
• 🔄 The distinction between a change in demand (shift in the demand curve) and a change in quantity demanded (movement along the demand curve) is crucial for understanding market dynamics.
• 🔄 External factors other than price, such as income, tastes, expectations, and the prices of related goods, can cause shifts in the demand curve.

Q & A

What is the relationship between price and quantity demanded according to the script?

The script explains that price and quantity demanded are inversely related, meaning that as price increases, quantity demanded decreases, and vice versa.

What happens to the demand curve when the price of a product increases?

The demand curve itself does not change when the price of a product increases. Instead, there is a movement along the existing demand curve to a new point representing a lower quantity demanded.

Can you explain the difference between a change in demand and a change in quantity demanded?

A change in quantity demanded is a movement along the existing demand curve due to a change in the price of the product. A change in demand refers to a shift of the entire demand curve, which can be caused by factors other than the product's price, such as changes in income, tastes, or the prices of related goods.

What factors can cause a shift in the demand curve, according to the script?

The script mentions that factors such as changes in income, prices of related goods, consumer expectations, and the prices of complementary goods can cause a shift in the demand curve.

How does an increase in mortgage rates affect the demand for housing, as per the script?

An increase in mortgage rates leads to a lower willingness to buy at all prices, causing the demand curve for housing to shift to the left, indicating a decreased willingness to purchase.

What is the impact of an increase in apartment rents on the housing market, as described in the script?

When apartment rents increase, some individuals may decide to move from renting to buying a home, causing the demand for houses to increase at every existing price, which is a rightward shift in the demand curve.

What does the script say about the effect of income changes on the demand for normal goods?

The script states that as a person's income rises, they typically purchase more goods and services, leading to an increase in demand for normal goods.

How does the script define an inferior good in the context of income changes?

An inferior good is defined in the script as a product for which demand decreases when income increases, as consumers tend to switch to higher-quality or more expensive alternatives.

What role do consumer expectations play in affecting demand, as per the script?

Consumer expectations can significantly impact demand. For example, if investors expect home values to rise, they may rush to buy homes now, increasing the current demand.

How does the price of complementary goods affect the demand for a product, according to the script?

The script illustrates that when the price of complementary goods, such as gasoline for cars, increases, it can decrease the demand for the related product, such as cars, especially those that consume more fuel.

What is the critical difference between a change in demand and a change in quantity demanded, as explained in the script?

The critical difference is that a change in quantity demanded is a movement along the existing demand curve due to a change in the product's price, while a change in demand is a shift of the entire demand curve due to changes in factors other than the product's price.

Outlines

00:00

📈 Understanding Demand and Its Changes

This paragraph explains the concept of demand in economics, highlighting that it represents various combinations of price and quantity demanded. It emphasizes that an increase in price does not change the demand curve itself but rather leads to a movement along it, reflecting a decrease in quantity demanded at the higher price. The paragraph also discusses factors that can shift the demand curve, such as changes in mortgage rates, related markets (like the rental market affecting the housing market), income levels, and consumer expectations. It distinguishes between a change in quantity demanded, which is a movement along the demand curve due to price changes, and a change in demand, which involves a shift of the entire demand curve due to factors other than the product's price.

05:04

🔄 Anticipating Future Topics: Supply

The second paragraph serves as a预告 for the next episode, which will focus on the supply side of the market. It sets the stage for a discussion on how changes in demand versus changes in quantity demanded are different concepts. The brief mention of 'Supply' in the title suggests that the upcoming content will delve into the factors affecting supply, complementing the demand-focused discussion from the current script.

Keywords

💡Demand

Demand refers to the quantity of a product that consumers are willing and able to purchase at various prices during a given period. In the script, it is explained that demand is a collection of price-quantity demanded combinations, and it is inversely related to price, meaning as price increases, the quantity demanded typically decreases, assuming all other factors remain constant.

💡Quantity Demanded

Quantity demanded is the specific amount of a product that consumers are willing and able to purchase at a given price. The script uses the example of housing to illustrate that an increase in mortgage rates can lead to a lower quantity demanded at all prices, even if the price of the housing itself does not change.

💡Price

Price is the amount of money required to purchase a particular product or service. The script explains that a change in price leads to a movement along the demand curve, representing a change in quantity demanded, rather than a shift in the demand curve itself.

💡Demand Curve

The demand curve is a graphical representation showing the relationship between the price of a good and the quantity demanded. The script clarifies that the demand curve does not change when the price of the product changes; instead, there is a movement along the curve indicating a change in quantity demanded.

💡Shift in Demand

A shift in demand refers to a change in the entire demand curve, which can be to the right (an increase in demand) or to the left (a decrease in demand). The script explains that factors other than the product's price, such as changes in income, expectations, or prices of related goods, can cause a shift in the demand curve.

💡Mortgage Rates

Mortgage rates are the interest rates charged on loans for purchasing real estate. In the script, it is mentioned that changes in mortgage rates can affect the willingness to purchase housing, leading to a shift in the demand for housing, even if the price of the houses themselves does not change.

💡Related Markets

Related markets are markets for goods that are substitutes or complements for each other. The script uses the example of the relationship between the apartment rental market and the housing market to show how changes in one market can affect the demand in the other.

💡Income

Income refers to the money received on a regular basis for work or through investments. The script discusses how changes in income can affect the demand for normal goods, leading to an increase in demand as income rises, or for inferior goods, where an increase in income might lead to a decrease in demand.

💡Normal Good

A normal good is a product for which the demand increases as income increases. The script explains that homes are considered normal goods because as people's income rises, they are more likely to purchase them.

💡Inferior Good

An inferior good is a product for which the demand decreases as income increases. The script uses examples like ramen noodles and canned tuna to illustrate that as income rises, people tend to buy less of these low-budget items, opting for higher-quality alternatives.

💡Expectations

Expectations refer to the beliefs or predictions about future conditions. The script mentions that during 2003 to 2005, investors' expectations of rising home values in the Phoenix metropolitan area led to an increase in demand for houses as people rushed to buy before prices went up.

💡Complementary Goods

Complementary goods are two goods that are used together. The script gives the example of gas and cars, explaining that when the price of gas increases, the demand for cars, particularly less fuel-efficient ones, can decrease because they become more expensive to operate.

Highlights

Demand is a collection of price-quantity demanded combinations, showing an inverse relationship between price and quantity demanded when all else is constant.

If the price of a product increases, the demand itself does not change; instead, there is a movement along the existing demand curve to a new quantity demanded.

The underlying demand curve remains unchanged with price fluctuations; only the quantity demanded at each price point changes.

Factors other than the product's price can fundamentally alter the underlying demand, causing it to shift left or right.

Changes in mortgage rates can affect the willingness to purchase housing, even if housing prices remain the same, thus shifting the demand curve.

The relationship between the markets for apartments and houses is an example of how changes in one can affect the demand in the other.

An increase in apartment rents can lead some consumers to consider purchasing a home instead, shifting the demand for houses to the right.

Income changes can affect the demand for goods and services; an increase in income typically leads to an increase in demand for normal goods.

Inferior goods may see a decrease in demand as income increases, as consumers opt for higher-quality alternatives.

Expectations about future price changes, such as in the housing market, can lead to shifts in demand as consumers rush to buy in anticipation of higher prices.

The price of complementary goods, like gas for cars, can significantly influence the demand for the related product, such as vehicles.

Fluctuations in the price of oil and gasoline have historically affected the demand for different types of vehicles, such as SUVs and trucks.

The critical difference between a change in demand and a change in quantity demanded is that the former is a shift of the entire demand curve, while the latter is a movement along it due to price changes.

A change in quantity demanded is a movement along the existing demand curve caused by a change in the price of the product.

A change in demand is a shift of the entire demand curve caused by a change in factors affecting the willingness or ability to buy, other than the product price.

Transcripts

Now we know, the demand is just a collection of price-quantity demanded combinations, showing

(all else constant) that price and quantity demanded are inversely related.

Question: What happens to demand if price goes up?

Answer: nothing.

Look; if I started out at price P1, then I would see that the associated willingness

to purchase (or quantity demanded) is Q1.

Now price goes up to P2.

What happened in the demand line?

Nothing.

But we do see a new lower willingness to purchase (quantity demanded) at Q2.

The demand itself did not change, since both of the combinations (P1,Q1, and P2,Q2) were

already part of the existing demand curve.

A change in the price of the product itself will NEVER change the underlying demand, only

the quantity demanded, shown by a movement along the existing demand curve.

Is there anything that could alter the underlying demand, causing it to move either to the right

(indicating that there is a greater willingness to purchase, even without a price change),

or to the left (indicating a decreased willingness to purchase, even at the same price)?

Well, yes -- the change in any of the other factors -- other than the product price -- will

fundamentally alter the underlying demand.

Like what?

Well, any of that other stuff.

OK, for instance, if I stick with the housing market example, a change in the price of housing

will not shift the demand.

Rather, it will cause movement along the existing demand for housing, or a change in the quantity

demanded.

BUT -- what about mortgage rates?

Even if housing prices are unchanged, an increase in mortgage rates leads to a lower willingness

to buy at all prices, and of course lower mortgage rates would lead to an increased

willingness to buy at all prices.

What about changes in related markets?

For example, take a look at the link between the market for apartments in the market for

houses.

Initially the price of a typical apartment is P1.

Q1 apartments get rented, and there is some demand in the related market for homes.

But what happens when apartment rents increase?

Sure, some folks will just pay the rent increase, but others will start thinking, ”Is this

worth it?

Wouldn’t it be better for me to put my money into my own home, instead of giving it to

a landlord every month?”

Such individuals now move over to the housing market, causing a greater quantity demanded

at every existing price; that is, the market demand shifts to the right, showing the effect

of a change in a substitute product market.

What about, say, changes in income?

Typically you would expect that as a person's income rises, that person would purchase more

goods and services.

If indeed this is the result, that is, an increase in income leads to an increase in

demand, then the product is a normal good.

Occasionally, however, an increase in income may result in a decrease in demand for a particular

good.

If this happens, you're dealing with an inferior good; typically, inferior goods are low-budget

items where, if you had more money, you’d buy something else -- something nicer – instead.

You know – ramen noodles, mac & cheese, canned tuna, generic brands, that type of

thing.

We could even use the housing example again, where demand for apartments (or living with

your parents) falls as your income rises, and you look for a home of your own.

In this example, the homes are normal good, and apartments are inferior good.

What about expectations?

From 2003 to 2005, investors expected huge increase in home values, especially in the

Phoenix metropolitan area.

What happened to the demand for houses?

Because everyone expected higher prices tomorrow, there was a rush to buy the homes today.

OK, one more example of demand shifter: what about the price of complementary goods, commodities

that must be used in conjunction with this product?

In the housing example, wouldn’t Homeowners’ Association fees affect the home-buying decision?

Perhaps an even better illustration of complementary goods would be gas and cars.

In the 1990s, gas was cheap -- oil was $22 a barrel and gas was about a dollar a gallon.

And demand for cars -- especially trucks and SUVs -- was high.

In 2008, oil hit $140 per barrel, and gasoline hit four dollars plus per gallon.

How did this affect the demand for cars, especially the gas guzzlers?

There is a critical difference between a change in demand and a change in quantity demanded.

Can you distinguish between the two?

A change in quantity demanded is a movement along the existing demand, caused by change

in the price of product.

A change in demand is a shift of the entire demand curve, caused by a change in anything

that affects your willingness or ability to buy, other than the product price.

NEXT TIME: Supply TRANSCRIPT0EPISODE 12: CHANGE IN DEMAND VS.

CHANGE IN QUANTITY DEMANDED