Unit 8 Text b

 

 

  Good morning, everyone. Today we’re going to look at shifts in the demand curve. Shifts? SHIFTS. The word basically means changes, but we economists prefer the word shift. So, shifts in the demand curve. You may remember from Table 3 we drew the demand for chocolate bars. We drew it for a given level of three underlying factors: the price of related goods, incomes and tastes. Changes in any of these three underlying factors will change the demand for chocolate.

  Let’s look at these shifts more closely. Take a look at Table 3 here. Can you all see it? Good. Now, this table illustrates the effect of a rise in the price of a substitute for chocolate. I’ve taken ice cream, as you can see in the table. Ice cream could well be a substitute for chocolate. Notice that at each chocolate price there is a larger quantity of chocolate demanded when ice cream prices are high. This is because people substitute chocolate for ice cream.

  Now look at Figure 4. Here I’ve shown the same change in ice cream prices leading to a shift in the demand curve. A shift from the line DD which you can see running from a price of fifty pence to 200 million bars per year, to a new demand curve running from seventy pence to 280 million bars per year. As you can see the entire demand curve has shifted to the right, and this is because a higher quantity is demanded at each price.

  OK so far? Good. Notice also that this shift to the right has changed the equilibrium price. It was thirty pence, and is shown by the letter E. Now it’s forty pence. And the new equilibrium quantity is 120 million bars of chocolate per year.

  Once we’ve reached this point, we can even sketch  how the chocolate market makes this transition from the old equilibrium at E to the new equilibrium. Think about it. Think about the moment the price of ice cream rises. What happens? Well, the demand curve shifts from DD, as you can see. Until the price of thirty pence changes, we now have excess                                  demand at this price. You can see this excess demand EH in the figure. At a price of thirty pence, 160 million bars a year are demanded, but only 80 million bars are supplied.

  What effect does this excess demand have? Well, it puts upward pressure on prices. The price of chocolate bars rises until it reaches the new equilibrium price, which as you can see is forty pence. But, notice this, this higher price reduces the quantity demanded. It reduces it from 160 million bars to 120 million bars.

  What lessons can we learn from this? Well, I suggest the first lesson is this. It is that the quantity of chocolate demanded depends on four things. In addition to the three factors I mentioned at the start of this lecture, prices of related goods, incomes and tastes, demand also depends on its own price. The price of chocolate that is. And this is why, when we draw demand curves, we always choose to single out the price of the commodity itself, in this example the price of chocolate bars. We put the price in the diagram together with the quantity demanded. The other three factors become what we’ve called ‘other things equal’, and any changes of these will shift the position of our demand curves. Now before I go on...