Episode 12: Change in Demand vs Change in Quantity Demanded
Summary
TLDRThis 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
- đ The demand curve represents the relationship between price and quantity demanded, showing an inverse relationship.
- đ 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.
- đ Changes in housing prices do not shift the demand curve; they cause a movement along the existing demand curve.
- đ” Changes in mortgage rates can shift the demand curve for housing, as they affect the willingness to purchase at all price levels.
- đ The relationship between related markets, such as apartments and houses, can cause shifts in demand when prices in one market change.
- đŒ 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.
- đą 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.
- đ 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.
- đ 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
đ 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.
đ Anticipating Future Topics: Supply
The second paragraph serves as aéąć 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.
Mindmap
Keywords
đĄDemand
đĄQuantity Demanded
đĄPrice
đĄDemand Curve
đĄShift in Demand
đĄMortgage Rates
đĄRelated Markets
đĄIncome
đĄNormal Good
đĄInferior Good
đĄExpectations
đĄComplementary Goods
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, âIs this
worth it?
Wouldnât it be better for me to put my money into my own home, instead of giving it to
a landlord every month?â
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, youâd buy something else -- something nicer â instead.
You know â 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, wouldnât Homeownersâ 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
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