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Lesson 4: Demand

# Change in expected future prices and demand

This transcript discusses how changes in expectations of future prices can affect demand. If people expect prices to go up, they're more likely to buy now, shifting the demand curve to the right. If they expect prices to go down, they're likely to hold off on buying, shifting the demand curve to the left. Created by Sal Khan.

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• How are these relations: the shape of the curve (hyperbolic, not linear), the way the curve changes under certain circumstances (such as a rightward shift with increased prices for a substitute), determined? Based on what data? I can also imagine cases where with more expensive substitutes the demand will decrease instead of increase, because if something is perceived as cheap it can become less desirable, instead of more (especially with particular products). Or does it maybe depend on where in the curve we are wether it shifts left or right? Also very imaginable. So from which data are the shapes of these curves and the nature of the changes derived? And do they always hold?
That is where the shift of the curve comes into place. You are right Ellen that sometimes to see the change we have to know where in the curve we are. But, that is only for a single consumer or for a single group of consumers. At some points of the curve, people buy more as the price decreases at some people buy less with the same price decrease. That is why the shape of the curve is parabolic and not linear. If at any price change people were changing the same quantity purchased the line would be linear. It is easy to understand if you imagine a square. Since all of the sides of the square are the same, if you draw the line from one corner to the other it would be perfectly linear, perfectly dividing 90 degrees angle into two of 45. Our graph is made up of those many squares. You can count each graduation on the line as a square. And X and Y axes as the sides of this square. So if both sides are equal, that means if both the change in price and change in quantity is the same then the line that connects the corners is a perfectly straight 45 degrees line. If you combine all those straight 45 degrees lines of all of those squares you would get one long straight 45 degrees line.
Now, to the rightward shift of the demand curve as the price of substitutes rises. You can get the data if you run an experiment, and I am sure there were economists who did that for you since Adam Smith (1723 - 1790) who considered to be the first introductor of the concept. But it is easier to understand why it is true if you think of your or anyone's daily life. Let's consider meat. Chicken and Beef are the substitutes among many others. So as the price of beef goes up people eat more chicken, right? If they have taste for meat and they cannot afford beef they buy chicken. So the demand for chicken rises at any point of the demand curve. That is why it shifts rightward. Since on the horizontal axis, we have quantity so as the quantity rises for any point of the price the curve shifts.
It is true that when you go to the market there is no range of the prices and quantities just like at the demand curve, but the curve reflects all the possibilities that might happen. When the price is infinite and the quantity demanded is zero and when the price is zero and the quantity demanded is infinite. That is why when the price of a substitute product such as beef goes up the overall demand for chicken goes up. It does not matter whether the price of the chicken is five dollars or ten dollars in both cases there would be more people buying both at five and ten. It does not mean of course that the quantity demanded is the same, otherwise, it violates the law of demand. It is always more people buying at five dollars than at ten, but as there is no other choice (beef is too expensive) people buy more both at five and ten.
Dear Ellen, I tried to answer your question as short as possible. But, your question covers many areas of the economics, so it is very difficult to answer it in one sentence.
Please let me know if there are any blind spots or if you have any questions I would be happy to answer them.
Sincerely, Anatoly.
• How does this apply to sales in stores? Are stores relying on pent up quantity demand for the day that they specify the price will drop?
• Stores know, or expect, that if they lower prices they will increase the quantity demanded. In practice you can see how stores attempt to increase demand when they have big seasonal sales, such as a boxing day sale, in order to sell off their inventories.
• what would happen if just demand would change? for example more people are deciding to buy iphones would the demand curve for iphones shift or would it just move down to the right along the line?
• The demand curve would shift to the right, it would not move along the curve.
• What is the difference between a change in demand and a change in quantity demanded?
• Demand is the "relationship" between "quantity demanded" and "price", so when plotted in a figure, demand is like a curve where "quantity demanded" and "price" are axes. Thus a change in demand is shifting this curve while a change in "quantity demanded" indicates another point on this exact curve.
• So basically, when people think the price is going to go up, more people buy the product and when people think the price is going to get lowered, they wait until the price lowers?
• Yes, when people think that the price will go up, they will start buying more at the current price so that they will not have to buy the same at a higher price.
Similarly when the price is expected to fall, people will hold their purchases until the price lowers.
• What is price of related good mean? What does price of related goods do?
• A related good (a computer, a car, etc.) is either a substitute to a good or a complement to a good (used in conjunction with). So I have a car, a motorcycle would be a substitute and the tires for both would be a complement. The prices of all of these goods are tied together in some fashion because they are related to one another.
• Would it be fair to assume that change in expected future prices for 'service demand' (as opposed to 'product demand') would be irrelevant?
• It should be relevant, so long as people have the option to wait or have the service sooner.

A recent example from my local area is the demand for solar panel installation when the government announced a subsidy program and later when they announced the end of the program. People waited for the beginning of the program to have their panels installed (lowering demand) and then rushed to have it done when the program was close to ending (increased demand).
• please explain what a linear demand curve is.
• It is a linear demand curve is if the graph is a straight line instead of a curve.