Class notes
lecture notes
- Course
- ECON 101
- Institution
- University Of Manitoba (UManitoba )
Lecture notes of 2 pages for the course ECON 101 at UManitoba (lecture notes)
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Prices of related goods are a crucial determinant of demand for a particular good. When theprice of a substitute for a good rises, the demand for the good increases, as consumers switch
from the more expensive substitute to the relatively cheaper good. For example, if the price of
energy bars increases, consumers may switch to a substitute like granola bars or protein bars,
which can be used in place of energy bars. This substitution effect leads to an increase in
demand for energy bars.
On the other hand, when the price of a complement for a good falls, the demand for the good
also increases, as consumers are now able to purchase the complement and the good together
at a lower price. For example, if the price of bottled water falls, the demand for water bottles
may increase, as consumers can now purchase both items at a lower total cost. This
complementary effect leads to an increase in demand for energy bars.
In economics, these effects are known as the substitution effect and the complementary effect,
respectively. They are important in understanding consumer behavior and the dynamics of
markets.
It is worth noting that the extent to which these effects impact demand depends on a number of
factors, including the availability of substitutes and complements, the degree of substitution or
complementarity, and the income level of consumers. Additionally, the effects may not always
be straightforward, as changes in the price of one good may have indirect effects on the
demand for other goods as well.
Overall, understanding the relationship between prices of related goods and demand is a
fundamental concept in economics, and has important implications for businesses and
policymakers alike.
Expected Future Prices and Demand
When consumers expect the price of a good to rise in the future, they are likely to buy more of it
now to avoid paying a higher price later. This increased demand leads to a rightward shift in the
demand curve, meaning that consumers are willing and able to buy more of the good at any
given price. The opposite is also true: if consumers expect the price of a good to decrease in the
future, they may delay their purchases, leading to a leftward shift in the demand curve.
Income and Demand
When consumers' income increases, they have more purchasing power and are able to buy
more of most goods, leading to a rightward shift in the demand curve. However, this effect is not
the same for all goods. For normal goods, which are goods that consumers consider desirable
and are likely to purchase more of as their income increases, the demand curve shifts rightward.
For inferior goods, which are goods that consumers view as less desirable and are likely to
purchase less of as their income increases, the demand curve shifts leftward.
Factors That Shift Demand
Besides expected future prices and income, there are several other factors that can shift the
demand curve for a good, including:
1. Prices of substitute goods: If the price of a substitute good (a good that can be used in
place of the original good) increases, demand for the original good may increase as
consumers switch to the cheaper option. This leads to a rightward shift in the demand
curve.
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