Aggregate Demand Curvesand Shifting Demand

Punchline: Aggregate demand curves are not the same as the sum of individual curves.

Big ideas• As individuals we would buy less when prices go up to

find a quantity where our individual marginal utility = the new, higher price.

• But in a social context, what we buy is influenced by others.

• We may buy more to impress others (Veblen effects) or because higher prices signal higher quality (price signals).

• Or we may buy more of what others are buying because we want to join the crowd (stampedes and fads) or because we want the convenience of fitting in (network economies).

• Changes in any of these, in preferences, income, the price of complements or substitutes changes the amount bought at any price, moving the demand curve.

How do we react when prices rise?Orthodox: MU and downward sloping demand curves:

We buy less until our MU equals the new, higher price

Real World: Social demand

Sometimes we buy more when others want something; higher prices signal status

It depends on whether we consume as individuals or as part of a group

Do you shop for yourself?

Then why do some many of us dress alike?

Men dress like men; women like women.

If dresses fell in price would men wear them?

Why we care what other people do?

Social sources of utility from consumption

• Status: Showing off. Veblen effects.• Bonding: Being one with your group.

Stampedes.• If others buy it, that means it is a good product.

Price signals.• If others buy it, I will fit in if I have it also.

Network effects.

“Veblen Effectts” after Thorstein Veblen (1857-1929)

Veblen was different.He had many affairs, with

married women, and with his (female) students.

In The Theory of the Leisure Class (1899), he said that we buy to impress, “conspicuous consumption”.

Veblen argues that we consume to impress others

We buy things to signal to others that we are successful.

Does this explain why some people wear such uncomfortable clothes?

Sometimes we buy what others buy to join the crowd. Status is in doing what others

do, but a little better.Does this explain why men

don’t wear dresses, but women do?

Some things help us to fit in:

Sometimes we follow the crowd because we think they know better

Prices tell us how others rate a product. Sometimes we value their judgment.

How else do we know if we are buying a BMW, or a lemon?

How do we know what we are buying?

A study using brain imaging found people like wine better if they believe it is expensive.

Higher prices validate our choicesIt was hard to drink

wine in this

If everyone else starts to buy something, how do we react?

Do we stop buying it because the price has gone up?

Or do we buy more because we are now part of a larger network of people who consume the same thing?

Do you want to be the only one with a metric ruler?

How would you react if prices rise?• Buy less because of marginal utility?• Buy more to show off that we can?• Buy more because the higher price signals that

this is a good and desired product?• Buy more because this signals that others are

buying it and we want to fit in?

Sometimes we want what others have because it is convenient to be part of a

network

It can be easier to communicate with those who consume like us.

It is easier to get spare parts. And help.

Maybe not enough

Maybe aggregate demand curves look like this?

Higher prices go with higher demand because prices signal quality and status.

Even if there is diminishing MU.

Moving demand curves

• Demand curves move when the amount purchased at any price changes.

• Change in demand may reflect changes in preferences, in income, or in the price of substitutes or the price of complements.

• Demand may change because of social circumstances: social infrastructure, or the strength of networks, and fads.

When demand curves move out

More will be purchased at any price; or consumers will pay more for the same amount.

P

Q

When demand curves move in

Less will be purchased at any price; or consumers will pay Less for the same amount.

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Examples of moving demand curvesChanging preferences: Stuff that people don’t want anymore

VHS tape players: Prices have fallen but people still won’t buy. You can get one for free at the town landfill.

Stuff that people now really want.

Hybrid cars: Despite rising prices people are buying more.

What moves demand curves, 2:Changes in income

China and India are getting rich enough to buy oil, increasing world demand

What moves demand curves, 3:Changes in the price of substitutes and

complements

A “complement” is consumed with something.

Which is a complement to college?

1. Beer2. Textbooks3. No-doz/coffee4. All of the above5. None of the above

When the price of a complement rises, demand falls

What is the effect of gas prices on demand for big cars?

Does demand:1.Rise?2.Fall?

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A substitute is consumed instead of something

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When the price of pot rises, demand for beer increases

Beer market

Substitutes

Social factors move demand curves: Fads, social infrastructure, and

networks

I put Beethoven here because everyone is supposed to like his music.

FadsSocial preferences change

When other people decide they like something, it is more desirable and the demand curve shifts out even more.

How else to explain the Jonas Brothers? Or Twilight?

Social InfrastructureSocial substitutes and complements

Society can shift demand curves by providing infrastructure: roads, bridges, airports, fiber-optic cables, sewers and water supplies, etc..

Infrastructure Investment works as a complement or a substitute

It can increase demand (shifting the demand curve out) when it is a complement.

For example, airports and jet fuel.

Or it can be a substitute, reducing demand (shifting demand curves in).

For example, roads and demand for mass transit.

What would happen to the demand for cell phones if there were no cell

towers?

Or demand for cars without roads?Or demand for cars if we had really good mass

transit and bicycle lanes?

Summary demand curves:• Acting as individuals, we buy less when prices rise because

of Diminishing Marginal Utility.• Belonging to a group, we may buy more at higher prices to

gain status (Veblen effects), or if higher prices signal better quality (price signals).

• We may buy more to be part of the crowd (stampedes) or for the convenience of fitting in (network economies).

• Demand curves shift out if income rises, preference move towards the product, or the price of complements falls or substitutes rises.

• Demand curves shift in if income falls, preference move away from product, or the price of complements rises or substitutes falls.