Okay, hi there, welcome to the third in our suite of videos looking at the market for strawberries, providing an introduction to the basic economics of supply and demand. In this third video, we're going to look at demand curves and think a little bit about the nature of the demand curve for a product, in this case strawberries, and how the curve might shift over time. We're working in an XY space with the market price of strawberries on the Y axis.
and the quantity traded of strawberries in a kilos traded per hour per day for example on the x-axis and we ask a simple question to start with what relationship would you expect between the market price of strawberries and the level of demand for them the quantity demanded at a given price from consumers from purchases of strawberries Well normally, normally we draw the relationship as an inverse one between price and quantity demanded. In other words there is an inverse relationship between how much people have to pay and the quantity they're willing and able to buy. So if we give it a given price for example let's say two pounds per kilogram the quantity sold could be Q1 in a given time period the price was to go up to two pound fifty per kilogram other things being the same we would expect there to be a contraction of demand we'd expect some consumers to cut back on their demand for strawberries perhaps they might switch to an alternative product equally the price came down let's say to one pound fifty per kilogram then that price reduction acts as an incentive for consumers to consider increasing, or we call it actually an extension or expansion of demand. Moving down the demand curve, the price cut brings more consumers into the market.
Now, the key point for your notes and for revision is that a change in the market price of strawberries themselves, changing the price of the product itself, causes either movement up or down the demand curve. It causes a movement along the demand curve for strawberries. This is quite important to get your head around initially.
If the price of the product itself changes, we move along the demand curve for a particular product. However, we also know that there can be a change in demand for strawberries. That position of the demand curve in the XY space there can change. If we take a given price of two pounds per kilogram it could be the case that for the same price there's a higher level of demand, an increase in demand or we call that an outward shift and that means for that same price of two pounds per kilogram then there's going to be increase in quantity demanded.
Q4, we did it numerically, you'll see why in a second, but an increase in demand means that quantity goes up from Q1 to Q4 at the same price. Something must have happened in the market to cause that. It's good news for strawberry growers, they can now sell more at that price, or they can sell the existing quantity, Q1, at a higher price in the market.
Equally, that could be a fall in demand. demand, an inward shift of demand, meaning that less is bought at the same price. Demand conditions might have changed such that there are fewer consumers willing and able to buy strawberries in the market.
And again we'll go through some examples in the second little exercise to take you through that. So a change in, a change in factors other than the price of the product themselves will bring about a shift in the demand curve. That's really quite an important point. A leftward movement is a decrease in demand, an inward shift of demand, an outward shift is on the the other side. What I've done is just make this diagram slightly smaller.
So D1 to D2 is an outward shift, D1 to D3 is an inward shift of demand for the same price level. Okay, here are five factors, five changes in the market. And your little task here is to think, well, what's going to happen to the demand curve for strawberries in this situation?
Are we going to go from D1 to D2, an outward shift? Or are we going to go from D1 to D3, an inward shift of demand? Press the pause button, have a go, work your way through the five examples. And we'll go through them together when you're ready. So we have five changes in the market.
There's going to be a shift in demand or perhaps a movement along the curve. Perhaps there might be a movement along the demand curve. Let's see what you think. First one, a rise in the price of a substitute for strawberries. Perhaps an increase in the price of raspberry or blueberries or something or some other or cherries or some other substitute to strawberries.
What's going to happen to the demand for strawberries? Well, there's going to be an outward shift because the price of strawberries now is lower relative to their substitutes. and we'd expect some consumers to shift their demand away from the substitutes towards strawberries. So if the price of cherries goes up, for example, people might decide to buy fewer cherries in the supermarket and buy a punnet of strawberries instead. What about a rise in the price of a complement to strawberries?
Well, this would presumably cause an inward shift to D3 because if people are buying, for example, if ice cream becomes more expensive, people are buying less ice cream and therefore they may well buy less strawberries as a result. What about the third one, a fall in real, in other words, after inflation, real disposable income for housing? Well, we're going to assume here that strawberries are a normal good, that people tend to buy more when they're better off.
So a fall in incomes, maybe a rise in tax, a rise in inflation, a fall in real disposable incomes would cause an inward shift from D1 to D3. Successful advertising campaign promoting strawberries as a health food. That should cause.
An outward shift, I would think, from D1 to D2, because people, perhaps the perceived utility, the perceived satisfaction or health benefit has gone up, and therefore more people in the market, at any given price, P1, at any given price, more people in the market looking to buy. Now the last one. Supermarkets lower the price of strawberries in a price promotion.
So you walk into the supermarket and you find that strawberries are on promotion. There's been a discount to the usual price. Which way is the curve going to shift?
D1 to D2 or D1 to D3? Well, the answer is it's not going to shift at all. A change in the price of the product itself, so price discount, causes a movement along the demand curve.
So we move down D1 to a higher level of quantity traded. Here's a quick summary. Any change in the conditions of demand factor other than the price of the product itself will cause a shift. in the position of the demand curve.
A change in the price of the product will cause a movement along the demand curve. I just want to finish this little video, this third session, by thinking about the nature of the demand curve. Oftentimes students do say this, you know, why are we drawing a curve as a straight line?
Why do we draw demand curves as a linear function of price? Well, we normally do that. A little bit helps to simplify. the analysis. But I think we know that the demand for a product, other factors remaining the same, incomes, prices of complements and substitutes, for example, the demand for product is unlikely to be a straight line.
It's likely to be non-linear. The responsiveness of demand to a change in price may well be different at different price points in the market. Here's a possibility in terms of the shape of demand.
It's not necessarily inevitable, but I've drawn this as a non-linear function. Yes, the quantity traded goes up as the price goes down, but you can see the the response of those varies by price. Take a price P1, if we cut the price from P1 to P2, we get an expansion down that demand curve and it looks like consumers aren't particularly sensitive to the price there, that few people buy more.
But equally if we were to raise the price above P1 to P3, price rises above a certain point, this is where consumers really do start to cut back on demand, there's quite a responsive effect. perhaps that is enough, that's the trigger for them to move to alternative products. And equally, if strawberry prices became very low in the market, extremely low, then if price fell from P2 to P4, we might get another very positive response there in terms of the quantity traded. So in your exams, in your economics, you would normally draw demand curves, in inverted commas, as a straight line. But be aware that there's, it's unlikely to be the case.
It's nearly always the non-linear. relationship between price and demand. In the next video, we will turn our attention to the nature of and position of supply curves.