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

Chapter Three: Demand 70 wheat for future sale. She may even buy more. Likewise, an expectation of a price decline in the future will result in a decrease in current demand as individuals on the margin will try to delay their purchases to take advantage of lower future prices. Demand can also change as the price of related goods (complements or substitutes for that good) change. Consider hot dogs. If the price of hot dogs rises dramatically, we know from the law of demand that the quantity demanded will fall (look at Figure 3.1 and follow the curve up and to the left to see this). What do you think will happen to demand for hot dog buns? Very few people want to buy a bun by itself. Hot dog buns are complements to hot dogs—they go together. In this case the demand curve will shift left, as in Figure 3.3 . Demand for goods can also be affected by the demand for substitutes . A substitute is a good that meets most of the characteristics of another good such that it can replace the other if necessary. A classic example is beef and chicken. If the price of beef goes up, what will happen to the demand for chicken? We know by following the demand curve in Figure 3.1 that if the price of beef rises, the quantity demanded (notice we did not say demand) of beef will fall. Since chicken is a substitute for beef, the demand for chicken will rise. The demand curve shifts up and to the right as in Figure 3.2 . This is because as the relative price of beef to chicken rises, the opportunity cost (of the chicken forgone) of beef increases. Of course, some critics of economists might say, “I don’t even like chicken. I like beef and would never switch, no matter the price. I don’t buy that the demand for chicken necessarily goes up.” Can you think why that logic is wrong? Remember, all prices and decisions are determined on the margin . It is the marginal decision that matters. At the margin, prior to the rise in the price of beef, there were buyers who were almost ambivalent as to whether they would purchase beef or chicken. It is these buyers who will change their behavior and choose chicken once the price of beef rises. It is irrelevant that the price change may not even influence the majority of buyers. It is the change of behaviors on the margin that matters. P ($) Q (#) Q 1 Q 2 D 2 D 1 P 1 Figure 3.3, Decrease in Demand. As the quantity demanded of a good decreases (such as our example in the text of hot dogs), complementary goods such as hot dog buns will see a decrease in demand, as in the graph above. At any given price, less buns will be demanded and we move from Q1 to Q2. quantity demanded: At every price, the demand curve identifies a specific quantity that consumers are willing to purchase; movement along a demand curve is said to change the quantity demanded, while a shift of the demand curve is a change in the demand substitutes: goods that share similar characteristics such that one good may reasonably replace the other complements: goods that are usually consumed jointly (at the same time)