Change in expected future prices and demand | Microeconomics | Khan Academy

We’ve been talking about the law of demand and how if we hold all else equal, a change in price affects the quantity demanded. If price goes up, the quantity demanded goes down, and if price goes down, the quantity demanded goes up. So, if you hold all else equal—ceteris paribus—we are just moving along this curve depending on what price.

But what we started talking about is what happens when you change some of those things that we've been holding equal. How does that change demand? In the last video, we talked about the price of related goods. The price of related goods and how if the price of related goods changes, both complements and substitutes, how that might change, how that might increase or decrease demand—the entire curve, not just one particular scenario.

Now let's talk about another one of those factors that we've been holding constant and think about how that would change demand—the entire curve—if we were to change that, and that’s expectations of future prices.

Expectations of future prices. So, let’s say that let’s talk about a first scenario right over here where let’s say that this curve—people didn’t expect prices to change for my ebook, and now all of a sudden people expect there’s a change in expectation. Now all of a sudden they expect the prices to go up going forward. So, now expect the future price—the future price to go up.

What’s going to happen if you expect the future price to go up and the good or the product in question is something that you can store? Well, depending on how much you expect it to go up, you’re probably more likely to buy it now—buy it before the price goes up. So, regardless of what point on this curve we’re at, regardless of the price point at any one of those price points, people now, because they want to— instead of buying it later—they want to buy it now.

They are more—the current demand will go up at any of these price points. So at $2, more people will want to buy it because they think it’s going to go up. At $4, more people will want to buy it because they think it’s going to go up. At any of these price points, because now there’s an—the expectations have gone from being neutral to now expecting prices to go up, it will shift the entire curve to the right.

So this will shift the entire curve to the right. So this right over here is scenario one, and it depends on how much this changes to say how much this shifts to the right. But this is just the general idea. This is scenario one, and the shifting of the entire curve—you could say they increased demand. So this is literally demand increasing—demand. Demand increased.

And when we talk about demand—remember, and I’m—you're probably tired of me saying this—I’m not talking about a particular quantity; I’m talking about the entire curve shifting to the right because people expect future prices to go up. So the current demand went up, the current demand curve shifted to the right, and now we can just take the other side of that.

Imagine what happens in scenario two. Before, people were neutral— that was our curve right there. They didn’t have any opinion about whether future prices were going to go up or down, or maybe they just assumed they were going to stay the same. And now they expect future prices to go down. Now expect future prices—the future prices to go down.

And this is something that happens in consumer electronics all the time. You see, whenever you buy a laptop or any type of electronic device, you now assume that the prices will go down. Now, what we’re talking about is a change in expectations. So you’re going from neutrality, or let’s say you’re going from, you expect them to go down, but now you expect them to go down even faster.

And if all of a sudden you expect them to go down even faster, you’re even less likely to buy them now. So if you expect—if before you thought prices were going to be roughly constant and now you expect them to go down, now you’re going to say, “Well, hey, at any given price point, why don’t I just hold off a little bit and wait a little bit?”

So it’s going to lower demand. So in this scenario, the whole curve will shift to the left. At any given price point, the quantity demanded will go down at any point on that curve, and so the entire demand curve will be shifted to the left. So because of scenario two, demand was decreased—demand was decreased.