Question

Discuss the determinants of demand (listed below) for a specific good: peanut butter. For each of the shifters, give an explicit example of a change in an external factor that shifts demand for peanut butter, then indicate whether your particular example would increase (shift rightward) or decrease (shift leftward) the demand for peanut butter.

• Number of consumers or size of the population
• Consumer taste and preferences
• Consumer income
• Related product
• Changes in Expectations

Answer 1

Among the various factors given:

1 The number of consumers or the size of population: If the number of consumers who would demand peanut butter would increase, then eventually the demand of the peanut butter would increase. Higher demand at the same prices would shift the demand curve to the right.

2. Consumer taste and preferences: The demand for a good is highly influenced by the tastes and preferences of that product. here if more people have started liking the peanut butter, it implies that the demand for the peanut butter would increase, while a shift of preference from peanut butter would reduce the demand for the peanut butter. Higher demand would shift the demand curve to the right while the lower demand would shift the demand curve to the left.

3. Consumer income: A peanut butter is a normal good implying that its demand would increase when the people start earning more while it reduced when the income declines. because a higher income would allow people to buy more or switch to the consumption of peanut butter from earlier cheap of an inferior good.

4. Related product: A related product can be of two types:

a. Substitute: Substitutes means that the goods can be consumed in place of one another. Here the consumption of peanut butter is related to the consumption of say soynut butter, tahini, etc. The higher prices of peanut butter would switch people to consume other related product and thus the demand for the peanut butter would decline. A decrease in demand implies the leftward shift of the demand curve.

b. Complements: A popular product which is consumed along with peanut butter is bread, and since used together they are known as complements. The demand for a product is also influenced by the price of compliment product, for example, a higher price of bread would reduce the demand for peanut butter as consuming the same quantity now will become costlier. Thus the demand for the peanut butter would reduce and also means that the demand curve would shift to the left.

5. Changes in expectations: If people expect that the price of the peanut butter is going to decline in near future, then they would choose to postpone their consumption to that period so that their cost could reduce. Similarly, the expatriation of higher prices in the future would increase the demand now as the extra can always be piled up in the pantry and thus the demand curve would shift to the right.