Demand, Supply and How Markets Work: Question 9
Syllabus 2.1, 2.2, 2.3
A limited-edition sneaker is released each year in a fixed quantity and later resold between collectors on an online resale marketplace.
(a) Explain what economists mean by "expectations of future price changes" as a determinant of demand. [2]
(b) Sneaker collectors begin to expect that the resale price of this year's sneaker will rise sharply once the current batch sells out, even though the price on the marketplace has not actually changed yet. Explain the effect of this expectation on the market demand curve for this sneaker today, stating the direction of any shift. [3]
(c) Separately, in a later month, the marketplace suspends the accounts of buyers from a country that previously made up a large share of registered buyers, significantly reducing the number of people able to purchase this sneaker, while the price of the sneaker itself is unchanged. Explain the effect of this event on the market demand curve for this sneaker, stating the direction of any shift. [3]
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Worked solution
Part (a): Expectations of future price changes
Expectations of future price changes are buyers’ beliefs about what will happen to a good’s price later on, and these beliefs can change how much buyers are willing to purchase today, even before the price itself has actually moved. If buyers expect a price rise in the future, they tend to bring purchases forward and buy more now, to avoid paying more later. If buyers expect a price fall in the future, they tend to delay purchases and buy less now, hoping to pay less later.
Part (b): A rightward shift caused by expecting a future price rise
The marketplace price of the sneaker has not actually changed. Collectors have only formed a new belief about what will happen to the price once the batch sells out. Because this is a change in expectations rather than a change in the sneaker’s own current price, it is a non-price determinant, so it shifts the demand curve rather than causing a movement along it.
Reasoning through the effect:
- Collectors expect the price to rise sharply once stock runs out.
- To avoid paying the higher expected future price, collectors try to buy the sneaker now, at today’s price.
- More collectors are therefore willing and able to buy the sneaker at every current price than before.
This means the demand curve for the sneaker shifts to the right: demand has increased, even though today’s price has not moved.
Part (c): A leftward shift caused by fewer registered buyers
This time the sneaker’s own price has not changed. Instead, the pool of people able to buy it has shrunk, because the marketplace has suspended a large group of previously active buyers. A change in the number of buyers in a market is a non-price determinant of demand, so it shifts the whole demand curve.
Reasoning through the effect:
- A group that previously made up a large share of buyers can no longer purchase on the marketplace.
- At any given price, there are now fewer people in the market wanting and able to buy the sneaker.
- Total quantity demanded at every price falls as a result.
This means the demand curve for the sneaker shifts to the left: demand has decreased.
Final answers
- (a) Expectations of future prices: expecting a future rise increases current demand; expecting a future fall decreases current demand, both without any actual change in today’s price.
- (b) The demand curve shifts to the right (demand increases), because collectors buy now in anticipation of a future price rise.
- (c) The demand curve shifts to the left (demand decreases), because suspending a large group of buyers reduces the number of people able to buy at every price.