Reasons for a change in demand

It is important to keep straight the difference between a change in quantity demanded, and a change in demand. There is only one reason for a change in the quantity demanded of some good: a change in its price; however, there are several reasons for a change in demand for the good, including:

1. Changes in the price of related goods: The demand for a good may be changed by increases or decreases in the prices of the other, related goods. These related goods are usually divided ^nto two categories called substitutes (for example, butter and margarine) and complements (for example, shoes and shoelaces).

2. Changes in income: The demand for a good may also be affected by changes in the incomes of buyers. Normally, as incomes rise, the

demand for a good will usually increase at all prices, and vice versa. Goods for which changes in demand vary directly with changes in income are called normal goods. There are some goods, however, for which an increase in income leads to a decrease in demand and a decrease in income leads to an increase in demand. Goods for which changes in demand vary inversely with changes in income are called inferior goods. For example, consider meat and bread. As incomes increase, people demand relatively more meat and relatively less bread, implying that meat may be regarded as a normal good, and bread may be considered an inferior good.

3. Changes in preferences: As peoples' preferences for goods and services change over time, the demand for these goods and services will also shift. For example, as the price for gasoline has risen, automobile buyers have demanded more fuel-efficient, "economy" cars, and fewer gas-guzzling, "luxury" cars.

4. Changes in expectations: If buyers expect that they will have a job for many years to come, they will be more willing to purchase goods such as cars and homes that require payments over a long period of time. If buyers fear losing their jobs, perhaps because of a adverse economic climate, they will demand fewer goods requiring long-term payments.

Supply

The buyers' demand for goods is not the only factor determining market prices and quantities. The sellers' supply of goods and services also plays a role in determining market prices and quantities. According to the law of supply, a direct relationship exists between the price of a good and the quantity supplied of that good. A change in supply is not caused by a change in the price of the good being supplied; that would induce a change in the quantity demanded. A change in supply is caused by other factors, including:

1. Changes in the prices for other goods: Suppliers are often able to
switch their production processes from one type of good to another.
For example, farmers might decide to grow less corn and more wheat
on the same land if the price of wheat rises relative to the price of

wheat.

2. Changes in the prices of inputs: The prices of the raw materials or
inputs used to produce a good also cause supply to change. An-
increase in the prices of a good's inputs will raise costs to suppliers
and cause them to supply less of that good at all prices.

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3. Changes in technology: Advances in technology often have the effect of lowering the costs of production, allowing suppliers to supply more goods at all prices. For example, the development of pesticides has reduced the amount of damage done to certain crops and therefore has reduced the cost of farming. The result has been an increase in the supply of these crops at all prices.