Okay, we're back here. I'm Jose Vazquez from the University of Illinois, and we are going to talk about, the change in the second determinant of demand, the price of a related good, the effect of that on the demand, and we've started using the example of the tomatoes. So this is on our little, description of demand is the price of, Y or the price of a different good, and what is the effect of that on tomatoes. Here I have our table, here where the demand schedule for tomatoes, that we explained before tells you what demand at different prices and next where we have our diagram that's going to basically reflect the same information. As we've said before this diagram basically is going to be a curve, so let's draw a little curve here with our big ruler I have here. If we connect all the dots is going to be a straight line like that and this is our demand, for tomatoes. Now, we're going to ask the question why did the price of related goods change? Well, this could be two types of related goods. One is a good that you consume with the tomatoes, and another one is a good that you consume instead of the tomatoes. So let's start with a good that you may consume with tomatoes not all people out there but some people may consume it with the tomatoes, and that's bread. Some people may want to the only reason you may consume tomatoes. So one of the main reasons you consume tomatoes is to have tomato sandwiches. So for you bread and tomatoes are like one good you consume them together. So in, we economists say that bread in this case, it's a complement of tomatoes, you consume bread and tomatoes together. So clearly the price of bread changes, the cost of the complimentary good completely which is, the tomato sandwich changes and you may actually demand less tomatoes. Right, so how would that affect our little model here? So let's start with first with an example in words, for instance say that, let's do it right here. Say that the price of bread right now the price of bread was actually $10. The price of tomatoes was actually, let's say, two dollars. So a tomato sandwich costs you essentially $12 right. Tomato sandwich costs you $12. Now, at $12 let's say you have, $14 a week so you can only buy one tomato sandwich a week. So if you need one tomato, for every tomato sandwich you'll demand only one tomato at a price. When the price of tomatoes is two dollars and the price of bread is $10 you demand one tomato. Now, imagine if the price of bread increases to $20. Now clearly, even if the price of tomatoes stayed the same at 22 a tomato sandwich will now cost you $22, which is more than the money you have. So you will not be able to actually, afford a tomato sandwich and say do you not going to eat a tomato sandwich, and the only reason you buy tomatoes is to actually, put it in a sandwich, you're not going to demand any tomatoes when the price of tomatoes is two dollars. So you see that the price of tomatoes did not change, but still, you actually stop consuming tomatoes at that price. So that is why the price of a related good will in fact affect, your whole structure of demand. So let's see how that looks like in a diagram, and in a table. So what we're seeing here, is that when the price of a related good like bread changes, your whole structure of demand changes because, even though the price of the tomatoes stay the same, you are going to demand a different quantities of tomatoes. So let's say that the price of bread increases as a doubles, the price of the complimentary good doubles. You're going to demand less tomatoes at every price, and we can make up the numbers here. We can say that when the price is zero now you're only going to demand 10 when the price is 2, 8, 6, 4, 2, 0. So you see that when the price of tomatoes is 10, you're already demanding less tomatoes. So the whole structure of demand change here, this is a new demand because, the whole cooked consumption of tomatoes at every price is different. If we look at that in the diagram, what we're going to do is basically well this doesn't apply anymore because that was when the price of bread was actually, one. Now, the price of bread is actually higher, now we have to draw a new curve, because we have different number we have different coordinates before we have zero and 12, now we have zero and 10. All right. So what we have to do to go from the table to the diagram is to draw a new curve. So now when price is zero is 10 so you're down here. When the price is two, you have eight. Right, so well, sorry, you're down here first, when the price is zero, you have 10. When the price is two, you have eight. Right, so you're down here. When the price is four you are six, when the price is six you are four, when the price is eight you are two, and when the price is 10, you demand no tomatoes. Right, so we got rid of this and now the coordinates is with this column, and this column right here. So if you look at this, and we again connect all the dots here, big ruler, while you have, is essentially a new, demand curve. You have a new demand curve. Because now, remember when I told you last lesson that, when the price of a good changes, the structure of the demand doesn't change, because it had numbers on change. Now, they change. Right, because when the price of the bread change, the whole structure of the table change, we had to, write down new numbers and that mean that we need to draw a new curve. So economists say that, when the price of a related good like bread for tomatoes changes, what we have is a change in the whole structure of demand which we call a change in demand. That may create a change in the quantity of demand, but we do know for sure that the actual demand the whole demand change, because people will demand different quantities at every price. Clearly when the price of bread increases people demand less tomatoes, when they are at every price. When the price of bread decreases, back here, think about the price of bread actually goes down to five, well [inaudible] two to five and you have $14, now you can buy two tomato sandwiches. So you will require two tomatoes for that. So the price of bread decreases, you are going to demand more tomatoes at every price. So what we have to do here is to write down higher numbers instead of lower numbers a new column, and that will mean that we will have a curve, to the right of the original. When the price of tomatoes- when the price of bread goes down, people demand more tomatoes at every price will mean that demand for tomatoes increases means, are at higher numbers in the table a shift to the right of the demand curve. Okay. So that is the effect of a change in the price of a complimentary good. What will be the change of the effect of a change in the price of a substitute good, a good that you consume instead of tomatoes? Let's look at that next. We are trying to determine the effect of different changes in the factors of demand, and we're using the examples of tomatoes, and now we're going to take another look, at change in the price of a different type of good, still a related good, a substitute. So this is a good that you consume instead of the good, and give you exactly the same pleasure or need, but it replace it. That could be for tomatoes, it could be something like red pepper. It's hard to find a substitute of tomatoes in the tomato salad, or in a recipe that calls for tomatoes, but some people say that you could get some of the benefits you get from tomatoes by using, red pebble instead. So what would be the effect on the demand of tomatoes if the price of red bell peppers changes. Let's do another example here with numbers before we jump into the tables and the ground. Say the price of red bell peppers is $10, and when the price of red bell peppers is $10. The price of tomatoes is two dollars, tomatoes are pretty cheap, so you rather use tomatoes than red bell peppers, at that point you actually demand, let's say one tomato. Right. Then you don't consume any red peppers at all. Now, what will happen if the price of red bell peppers goes down as to an extreme example to let's say, $0.02? Well, now all of a sudden, you start looking at red bell pepper because I look a lot better than tomatoes I mean at least, the amount of red peppers you are getting for the money. So you may actually decide that when the price of bell peppers are actually $0.02, and the price of tomatoes the same two dollars. You might decide to switch, instead of consuming that with tomato, and put it in your salad you actually going to put red pepper in your salad. So what do you do in here, is you're replacing tomatoes for bell peppers, because the price of the peppers went down. You see that, it's not that the price of the tomatoes go down, the price of the tomatoes stays the same but you are consuming a different quantities of tomatoes. So again, same case that was when the change in the price of bread ,for that, we need to draw a whole new demand schedule because, the consumption on every price is different now. When the price of the peppers went down, you are going to consume more peppers and less tomatoes, so your consumption of tomatoes is going to go down again at every price, and we need to draw a whole new demand schedule for that. So the numbers- now we're working with, this is when the price of peppers was two dollars, I mean sorry, $10, this is the table that it really applies when the price of bell peppers is actually $0.02. So this is not up here anymore, and now we have new coordinates, and we have to put those new coordinates in the diagram in order to generate a new, demand curve and what we see, we're going to end up with the same thing that happened when the price of bread change. Which is a whole new demand schedule because, if you connect all the new coordinates, that we had for the, in the table for tomatoes, when the peppers decrease in price. If you pull all the new coordinates you end up with a demand curve that is to the left, of the original demand. So again what happened here well a change in the price of a substitute unrelated good again, change the whole demand for tomatoes because you changed the structure. When the price of the substitute when down, price of peppers went down, the whole demand curve shift to the left, and the opposite will happen if the price of the peppers actually is $20. You may actually if you were buying peppers before, and the price of peppers increases, by say, double, now you're going to switch from peppers to tomatoes and you might demand more tomatoes at every price. So the opposite will happen if the quantity- If the price of the substitute increases- when the price of the substitute increases, your demand for the good in this case tomatoes, will actually move to the left- which mean- to the right, which mean they increases. So here we have a shift to the right because of increase in the price of substitute. We have the opposite, a shifts to the left will mean a decrease in demand when the price of Y substitute decreases. Okay, so as you can see again when the price of a different thing other than the price of the ongoing changes, the whole demand would change. That's actually what's going to happen, when we evaluate the last two determinants of demand which is income and tastes. Every time you have a change, in something else other than the price of the good, you're going to have to construct a whole new column here. That means, that you're going to have to draw a whole new demand because there's no way around it. If you have a new column here there's new coordinates, and you're going to have to draw a new curve. So that means that, when the price either the price of related goods or anything else so then that the price changes, you will have a shift in the demand curve. Let's evaluate income next. Produced by OCE Atlas Digital Media at the University of Illinois Urbana-Champaign.
