Civil Engineering Reference
In-Depth Information
price. For most goods, therefore, an increase in income will lead to a rightward shift
in the position of the demand curve.
Goods for which the demand increases when income increases are called
normal
goods
. Most goods are 'normal' in this sense. There are a small number of goods
for which demand decreases as incomes increase: these are called
inferior goods
.
For example, the demand for private rented accommodation falls as more people
become able to buy their own homes. (It is important to recognise that the terms
normal and inferior in this context are part of an economist's formal language, and
no value judgements should be inferred when the terms are used.)
Price of Other Goods
Demand curves are always plotted on the assumption that the prices of all other
commodities are held constant. For example, when we draw the demand curve for
lead guttering, we assume the price of plastic guttering is held constant; when we
draw the demand curve for carpets, we assume the price of housing is held constant.
However, the prices of the other goods that are assumed constant may affect the
pattern of demand for the specific good under analysis. This is particularly the
case if the other good is a
substitute good
(as in the example of guttering) or a
complementary good
(as in the carpet and housing example). Economists consider
how a change in the price of an interdependent good, such as a substitute or
complementary good, affects the demand for the related commodity.
Let us consider the guttering example a little more fully. Assume that both
plastic and lead guttering originally cost £10 per metre. If the price of lead guttering
remains at £10 per metre but the price of plastic guttering falls by 50 per cent to
£5 per metre, builders will use more plastic and less lead guttering. The demand
curve for lead guttering, at each and every price, will shift leftwards. If, on the other
hand the price of plastic guttering rises, the demand curve for lead guttering will
shift to the right, reflecting the fact that builders will buy more of this product at its
present price. Therefore, a price change in the substitute good will cause an inverse
change in the pattern of demand for the other alternative.
The same type of analysis also applies for complementary goods. However, here
the situation is reversed: a fall in the price of one product may cause an increase in
the demand for both products, and a rise in the price of one product may cause a fall
in the demand for both.
Expectations
Consumers' views on the future trends of incomes, interest rates and product
availability may affect demand - and prompt them to buy more or less of a
particular good even if its current price does not change. This is particularly evident
when we consider the demand for construction based activities. Consider the
demand for housing (see
Tables 4.1
,
4.2
and
4.3)
. For example, potential house
purchasers who believe that mortgage rates are likely to rise may buy less property
at current prices. The demand curve for houses will shift to the left reflecting the fact
that the quantity of properties demanded for purchase at each and every price has
reduced due to consumer expectations that mortgage rates will rise.
