blanchard_ch03

For example suppose that a florida frost damages the

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Unformatted text preview: suppose that a Florida frost damages the season’s orange crop. You expect the price of orange juice to rise, so you fill your freezer with enough frozen juice to get you through the next six months. Your current demand for frozen orange juice has increased, and your future demand has decreased. Similarly, if the price of a good is expected to fall in the future, the opportunity cost of buying the good today is high relative to what it is expected to be in the future. So again, people retime their purchases. They buy less of the good now before its price 9160335_CH03_p053-080.qxd 58 6/22/09 8:56 AM Page 58 CHAPTER 3 Demand and Supply falls, so the demand for the good decreases today and increases in the future. Computer prices are constantly falling, and this fact poses a dilemma. Will you buy a new computer now, in time for the start of the school year, or will you wait until the price has fallen some more? Because people expect computer prices to keep falling, the current demand for computers is less (and the future demand is greater) than it otherwise would be. Income Consumers’ income influences demand. When income increases, consumers buy more of most goods; and when income decreases, consumers buy less of most goods. Although an increase in income leads to an increase in the demand for most goods, it does not lead to an increase in the demand for all goods. A normal good is one for which demand increases as income increases. An inferior good is one for which demand decreases as income increases. As incomes increase, the demand for air travel (a normal good) increases and the demand for long-distance bus trips (an inferior good) decreases. TABLE 3.1 The Demand for Energy Bars The Law of Demand The quantity of energy bars demanded Decreases if: ■ The price of an energy bar rises Increases if: ■ The price of an energy bar falls Changes in Demand The demand for energy bars Decreases if: Increases if: ■ The price of a substitute falls ■ The price of a substitute rises ■ The price of a complement rises ■ The price of a complement falls ■ The price of an energy bar is expected to fall ■ The price of an energy bar is expected to rise ■ Income falls* ■ Income rises* ■ Expected future income falls or credit becomes harder to get ■ Expected future income rises or credit becomes easier to get ■ The population decreases ■ The population increases Expected Future Income and Credit When income is expected to increase in the future, o...
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