What do you think of when you hear the word "demand"? Do you think of it as meaning something you're being asked to do? Or do you think of it as meaning something that you would like to have? In an economic sense it is the amount of some product that you as a consumer are willing and able to purchase. Have you ever thought about why your demand for a product changes over time? A few of the underlying factors that typically cause changes in demand for a product are a change in preferences, change in income, the price of related products, and future expectations. Graphically when demand changes for a product there will be a shift in the price, the quantity supplied and the quantity demanded. As we can see in Fig. 3-3 when there is an increase in the demand for wool sweaters due to a long cold winter in Odessa, the demand curve for wool experiences a rightward shift (from D1 to D2). This results in a greater quantity demanded than can be supplied producing a shortage of wool. The shortage causes an increase in price and a decrease in demand until a new equilibrium price ($700) and quantity (70 tonnes per year) is reached.
When you look back at old photos of your family, you will clearly see a change in preference for clothing fashions. As trends come and go, preferences for clothing styles change. As new materials that reduce or eliminate the need to iron your clothes, you preferentially buy these iron free clothes. As new technology is introduced you abandon your trusty flip phone for a new touch screen smart phone. Over time preferences change and this will alter the demand for various products.
As you progress through your career, you will invariably increase your income. This may reduce your demand for inferior products (students living on macaroni and cheese) and increase your demand for normal products (beef tenderloin). Alternatively, if we hit a speed bump in our career and our income is reduced, we will have to save money by reverting to inferior products and reducing our consumption of normal products. Additional increases in income may also increase our demand for products that are we previously couldn't afford and are not essential to live, such as vacations to tropical locations or private violin lessons. Income is a very important factor when considering the demand for products.
The price of related products will affect demand. Products may be substitutable (Coca Cola or Pepsi) or complementary (cars and gasoline). When prices in one substitutable product increase due to manufacturing or transportation costs, the demand for it's substitute may increase as people are not willing to pay more for what in their mind is the "same thing". An increase in price for a complementary product such as gasoline, may cause an increase in demand for smaller, more fuel efficient cars. Next time you are at the grocery store and are about to choose a jar of pasta sauce, think about the reasons for purchasing the brand you do? Does it have anything to do with the price of the other brands?
Finally, future expectations on the available supply, price, quality, or selection may change the demand for products. If a price decrease (lower production costs or a sale) is expected, you may choose to delay your purchase which then alters the current demand for a product. If you find a pair of shoes that fit really well, and you are not sure if they will still be available when you are ready to replace them, would you buy a second pair now? When natural disasters are approaching (hurricanes or blizzards) people will demand more water, food, batteries, shovels, generators, and other emergency equipment.
In summary, have you ever been in the grocery store standing in line waiting for the person in front of you to pay for their order when they start questioning the cashier on what the price for an item should have been because they thought it was on sale? When the cashier pulls out the flyer and explains that it was the jumbo size that was on sale not the family size, the person will say that they only wanted it because it was on sale. Have you ever purchased anything just because it was on sale and was a good deal? Then your demand for that product has been changed. Next time ask yourself if you just want something or really need it? But that's for another discussion.
Hey Glenn, great post. I like the example about looking at family photo albums and seeing the fashion changes.
ReplyDeleteThe demand for clothes/fashion is interesting. When they first come out, the demand is pretty modest, just because people need clothes, and also want the modern clothes. Then, 5 years later, nobody wants them. THEN, after about 25 years, people are willing to pay top dollar for authentic retro clothing.
I also like your example about buying things just because they're on sale. I can usually control myself, but once in a while I buy some really stupid just because it was dollar off, and it just sits there.