Demand and Supply - Demand Shift pg-19

Demand will also shift due to changing expectations. In this context, expectations refers to our beliefs about the future. Things happen all the time to change our expectations about future prices, our incomes, interest rates, fashions and so on. Changes in these beliefs will cause demand for many products to shift.

Suppose, for example, you want to buy a new video recorder that records directly to DVD. Before you make your purchase you read an article in the paper stating that the prices of such cameras will fall soon. In anticipation of lower prices in the near future, you postpone your purchase. Thus, the expectation of future price reductions shifted your current demand back. If you expect the price of gasoline to rise a lot, you may suggest to everyone in your family that they fill up all their vehicles right away. So, and expectation of a future price increase shifts current demand out.

If you have reason to believe that the coming summer is going to be hotter than normal, you might be more likely to buy an air conditioner in the spring. A prediction of a cooler than typical summer may cause you to postpone such a purchase for another year.

The effect of changing expectations on demand is straightforward and works exactly as you would expect. You have probably already thought of several examples. A word of caution is useful here. When we speak of expectations and future prices it's natural to think of the demand for investment goods such as stocks, bonds, collectibles and so on. It is true that the purchase of such goods always depends on expectations, but not necessarily in such a simple way as it might seem at first. Certainly the old adage about investment goods "buy low, sell high" is always good advice, but the study of investment behavior is beyond the scope of this text.

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