No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Three: Demand 68 will be used quite a bit in our analysis in economics, so you should get comfortable thinking about demand (and later supply) graphically. Notice that in this graph the downward sloping demand curve is a function of only one variable: price. This is very important as there are many, many errors made in some of the finest economic media because people refer to demand changing when price changes. As clearly seen in the diagram, there is one demand curve sloping downward as price decreases. Since there is only one demand curve, when price changes we simply move along the demand curve to a new position. We should correctly say that when price changes, quantity demanded changes. Demand, however, does NOT change. This does not mean, of course, that demand cannot change; it simply means that demand does not change as a result of a change in price . Demand can and does change for a whole host of reasons—many of which we’ll now review. But when demand changes, we do not move left or right along the existing curve, as that only occurs with price changes (and changes the quantity demanded). When demand itself changes, the whole curve must shift either left or right, depending on whether demand has risen or fallen. When demand increases, the entire curve shifts right as seen in Figure 3.2 . Notice that when the whole curve shifts right, at any given price the quantity demanded increases with the shift in demand. Similarly, if demand falls, the entire curve shifts leftward, and at any given price the quantity demanded falls. So what are the factors that cause demand to change, if not price? I’m glad you asked. Almost anything else can be a factor! One variable that affects demand is our income . As an income deprived student, your demand is greatly reduced from what it will be once you have a full time job. As your income rises, your demand for all normal goods will increase, although not necessarily proportionally. If demand for a good decreases as income rises, that good is called an inferior good . Conversely, when we have a recession in this country, unemployment will rise as additional workers are laid off. The demand curves for these individuals decrease as they’re forced to dip into savings and/or live off unemployment insurance. If demand for a good changes little with a change in income, we call that good a necessity . If demand changes greatly with P ($) Q (#) Q 2 Q 1 P 1 D 1 D 2 Figure 3.2, Increase in Demand. The demand curve can shift as tastes, income, expectations, etc., change. In this graph, the demand has increased, and the demand curve shifts right/up. Notice that when demand increases, at any given price, the quantity demanded has increased, such as above from Q1 to Q2. income: the flow of monetary payments (wages, interest, rents, etc.) received over a period of time normal good: a good for which demand increases with an increase in income inferior good: a good for which demand falls as income rises “ If demand for a good changes little with a change in income, we call that good a necessity. If demand changes greatly with a change in income, we call that good a luxury.” necessity: a normal good for which demand does not increase much as income increases