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Economics

How does the price of related goods influence demand?

Related goods are goods that are bought with another good (complements), or instead of another good (substitutes). An example of complementary goods is movie tickets and beverages. Often, when someone buys a movie ticket, they will also buy a beverage. Notice that the strength of this relationship changes depending on the product: it is more common for someone to buy a drink on its own—without going to the movies—than for someone to buy a movie ticket and not buy a drink. The law of demand states that when the price of a good increases, the quantity demanded for that good decreases, and vice versa. So, if the price of movie tickets goes up, people will buy fewer movie tickets. For the theatre, this means that not only will they sell fewer movie tickets, but they will also sell fewer drinks: this shows the complementary relationship between movie tickets and drinks. An example of substitute goods are two competing movie theatres. If people usually go to the movies at MovieZone **or** CinePlace, but not both simultaneously, then these brands are strong substitutes for each other. The strength of this relationship is determined by consumer behavior. A consumer who wants to go to the movies is likely to prefer either MovieZone or CinePlace to a different activity, like going to a museum. So museums are a weak substitute for either of the theatres. As above, the law of demand dictates that if MovieZone raises the price of tickets, the quantity demanded will fall. This effect is amplified if consumers are very willing to switch to CinePlace. For this reason, firms aim to build brand loyalty, weakening the strength of the substitution relationship with competing brands. :br :::center |If the price of MovieZone tickets | The quantity demanded for MovieZone tickets | The demand for drinks |The demand for CinePlace tickets | | :-: | :-: | :-: |:-:| | increases | decreases | also decreases |increases| | decreases | increases| also increases | decreases| :::

Economics

How does an increase in net exports shift the AD curve?

Aggregate demand (AD) is the total demand for an economy’s output at a given price level. It has four components: - Consumption (C): household spending on goods and services. - Investment (I): business spending on capital goods and raw materials. - Government spending (G): government purchases of goods and services (not transfers). - Net exports (NX): the value of exports (X) minus the value of imports (M). When any of these components increase, ceteris paribus, AD increases, shown by a rightward shift of the AD curve. For C, I, G, and exports, the relationship is straightforward: more spending on domestic output means higher AD. But it is less obvious why a fall in imports raises AD. Consider this example: If German households buy 5 German cars and 1 Japanese car, German output is 5 cars. Yet firms report sales as 6 cars, so consumption is recorded as the value of 6 cars. To avoid overstating domestic output, the value of the imported car is subtracted. In effect, imports are deducted from C, I, and G to ensure AD reflects demand for domestic production only. This is especially important with imported inputs. If a $\text{\textdollar}$100 belt is recorded as consumption but $\text{\textdollar}$20 of materials were imported, subtracting imports ensures AD reflects the $\text{\textdollar}$80 of domestic value added. Returning to the car example: if next year total car sales stay at 6 but imports fall to zero, consumption is unchanged, but domestic production must have risen from 5 to 6. In this case, households are substituting a domestically produced car for the previously imported one. Thus, lower imports—holding other components constant—mean greater demand for domestic output. In short: - If exports increase, foreign demand for domestic goods rises → AD increases. - If imports decrease (without a fall in C, I, or G), households or firms must be substituting toward domestic goods → AD increases. Therefore, when net exports increase—whether from higher exports or lower imports—aggregate demand increases, and the AD curve shifts to the right.

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Over 80% of IB students globally are experiencing the power of Revision Village

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Past Papers