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How and Why Market Prices Change, Changes in Demand

inferior goods, product falls, famous athletes, late-night talk, economic decisions

Demand for most products changes whenever there is a significant change in the level of consumers’ income. In the United States, incomes have risen substantially over the past 200 years. As that happened, the demand for most goods and services also increased. There are, however, a few products that people buy less of as income falls. Examples of these inferior goods include low quality foods and fabrics.

Demand for a product also changes when the price of a substitute product changes. For example, if the price for one brand of blue jeans sharply increases while other brands do not, many consumers will switch to the other brands, so the demand for those brands will increase. Conversely, if the price for beef drops, then many people will buy less pork and chicken.

Some products are complements rather than substitutes. Complements are products that are consumed together, for example cameras and film, or tennis balls and tennis rackets. When the price of a complementary good rises, the demand for a product falls. For example, if the price of cameras rises, the demand for film will fall. On the other hand, if the price of a complementary good falls, the demand for a product will rise. If the price of tennis rackets falls, for example, more people will buy rackets and the demand for tennis balls will increase.

Demand can also increase or decrease as a product goes in or out of style. When famous athletes or movie stars create a popular new look in clothing or tennis shoes, demand soars. When something goes out of style, it soon disappears from stores, and eventually from people’s closets, too.

If people expect the price of something to go up in the future, they start to buy more of the product now, which increases demand. If they believe the price is going to fall in the future, they wait to buy and hope they were right. Sometimes these choices involve very serious decisions and large amounts of money. For example, people who buy stocks on the stock market are hoping that prices will rise, while at least some of the people selling those stocks expect the prices to fall. But not all economic decisions are this serious. For example, in the 1970s there was a brief episode when toilet paper disappeared from the shelves of grocery stores, because people were afraid that there were going to be shortages and rising prices. It turns out that some of these unfounded fears were based on remarks made by a comedian on a late-night talk show.

The final factor that affects the demand for most goods and services is the number of consumers in the market for a product. In cities where population is rising rapidly, the demand for houses, food, clothing, and entertainment increases dramatically. In areas where population is falling—as it has in many small towns where farm populations are shrinking—demand for these goods and services falls.

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