Question about shift in demand curves...which my teacher wouldn't answer..

shizle

I'm sorry to intrude in here, I know ye probably don't want to be bothered by a 5th year Economics student, but I would really appreciate help, as I am quite confused.

Basically, we were talking about demand curves and when a shift in the demand curves occurs as a result of a factor such as change in price of a complementary or substitute good, etc. We were told to represent this on a graph, such as this:

http://faculty.tamu-commerce.edu/dfunderburk/231/images/graph4.jpg

The thing I didn't understand was as follows:

The price of the actual good itself hasn't changed, it is the change of the price of another good which has caused demand to increase (or decrease.) However, on the graph, when the demand increased, the graph clearly shows that the price has also risen, as if you extend both lines so that they hit the Y (Price) axis, one is higher than the other.

Surely this is a contradiction? We know that the demand has risen, however the graph shows that price has also risen. Yet, I learned that with normal goods, which obey the Law of Demand, when price rises, demand falls. Therefore how can both demand and price rise?

I don't understand why the graphs are not drawn like this:

http://s667.photobucket.com/albums/vv31/gurlywurly_2009/?action=view&current=untitled.jpg

Then the price would be staying the same, however the demand would be increasing or decreasing.

My teacher got very angry with me today in class, as I'm not sure he understood what I was asking and when I attempted to explain properly what I meant, he told me to 'just accept that this is the way we draw them.' I recognize that it may be a stupid question, but I am quite confused.

Thank you to anyone who has taken the time to read through this, I would really appreciate some help!

Économiste Monétaire

It's not a problem whatsoever to help people with questions, especially since it's obvious that you're trying to understand the subject but it's just not clicking—and your teacher sounds like an unhelpful gombeen.

Here's a graph that mimics your first graph:


As the demand curve shifts from D1 to D2, take any given level of price; here it's P*. What is the quantity demanded (Q*) after the demand curve shift? Has it increased or decreased? Is the shift from Q*1 to Q*2 an increase in the quantity demanded or a decrease in quantity demanded at any given price (P*)?

Treora

Teachers get scared of 5th years as you are not 6th years in panic mode vaccuming everything they say as gospel and yet you have reached a level of critical thinking that requires a thoughtful answer that might distract them from the messer down the back.

On the shift in demand curve. The utility of the product hasn't changed, but the market place has. Example: a renault kangoo. a renault kangoo with a wheelchair lift. The utility of getting around in a ranault kangoo hasn't change but now the number of people who have access to the market has. Hence the shift due to the complimentry product.

The angle of the supply/demand curve changes when the utility of possession changes. Buying a house (outside of Ireland, were inelastic) in central Wales in 2010 and 2011. The number of people doesn't change, nor their ability to pay. But say the local authority finds out, late 2010, that there is a large amount of naturally occurring radon gas filtering in to all of the housing stock. The utility changes, people might build their own houses with anti-radon filters or buy apartments that have been built to a higher standard. People's utility has changed as has the angle of the demand curve in 2011.

The shift and angle are dynamic (maybe even quantum). An example: housing in Detroit. As supply increased (2001-2005) the supply curve shifted, but at a certain stage the vacant houses encouraged criminals to move into the area and the angle changed a bit, but the estate agents phrased things to put the best spin on things. Then the media reports that a new to Detroit first time buyer was killed only two days after moving in to his house and the curve shifts and the angle changes.

Anyhow, give the teacher what he wants and join thepropertypin.com if you want an economic reality portal where youtube clips on how JP Morgan and co wrote the US Central Bank legislation so that the authority was owned by the banks it was designed to govern, economic heros run for the US senate and talk on NAMA will make you want to go to Uni in Germany or France or anywhere but soon to be IMFed Ireland.

shizle

Thank you, that makes perfect sense now. You see, I was just looking at the top price shown as the graph shifted to the right, which was obviously a higher price than the previous price. Then I was thinking about the general point the graph was making, which was that demand had increased. And it was putting these two factors together that confused me, as we had learned that it was the opposite relationship.

I understand it completely now however, by looking at the individual prices, rather than just generalizing. Thanks a million!