Question

Distinguish tastes from expectations and compare how changes can affect demand?

Answer 1

Distinguishing:

People’s taste changes as the income of people change – at higher income higher would be the taste and at lower income the taste will be low. Therefore, there is always a positive correlation between income and taste for normal goods.

Expectation doesn’t depend on income; it depends on the situation; such as there is the news of cyclone in near future, people expect to have worst future then; whatever be their income they want to purchase more for storing.

Affect:

Taste: At higher taste, demand would be more; it shifts the demand curve to the right. In case of lower taste, demand for the goods or services would be low; it shifts the demand curve to the left.

Expectation: in case of favorable expectation (such as the rate of inflation will be normal in future), today’s demand for items would be normal; there will be no shifting of demand curve. If the expectation is unfavorable (such as cyclone in near future), today’s demand should be high for future safety.