Shifting & Rotating A Demand Curve
By ET
When economists talk about changes in demand curve, they generally look at how the demand curve gets shifted. If suddenly all the consumers’ valuations are increased for some reason, the demand curve is said to be shifted outward. This means for a certain price, the demand will be higher; or equivalently for the seller, to sell to a certain number of consumers, the seller can charge a higher price.
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A recent paper in AER by Johnson and Myatt studies rotation of a demand curve: “On the Simple Economics of Advertising, Marketing, and Product Design” (vol 96, no. 3). The basic idea is that, through advertising, marketing, the firm can influence the dispersion of the consumers’ valuations. When the dispersion changes, the demand curve rotates.
That’s on the demand side. On the supply side, there is an interesting dual problem. Following Hal Varian (1980)’s formulation, when dispersion exists, each firm in the market has a density function f(p), which indicates the probability with which it charges each price p. Economists seem to be happy with this general form of pdf. However, when consumers interact with the seller, the seller would react to any changes in the consumers’ perceptions of the product, therefore, the density function may be changing over time. And, if it changes, I bet it would be rotating the cdf.
