Question

Read the article titled, "Here's how mellennials spend their money, compared to their parents". After reading the article discuss the shifts in demand for substitutes goods and services that you see the younger generation having on the economy. Using the article provided give an example of a good or service and what would be the cause for a shift in Demand. Conisder these questions: Will this change the way resources are used and the types of goods that are produced? Will it have an effect on additional services being offered, like social media, and push our economy to being even more service oriented? What about growing the economy, will it be more difficult if the younger generations are not spending?

Answer 1

The article is concerned with the lower rate of savings among the young generation and how they are spending more on comforts and conveniences than the older generations.

The first question is about how the demand curve of substitutes that young generation is consuming will respond to this. The young generation is consuming more of comforts (expensive coffee) which mean that the demand curve is flatter than that of the necessary goods (salt). As the spending on these goods has increased, the demand curve will shift to the right as given in the diagram.

The demand curve has shifter from D1 to D2 and thus the quantity demanded increased from Q1 to Q2. The above diagram represents the case where the product is consideration has perfect substitutes and thus the price level stayed at the same magnitude (increase in price will lead to consumers shifting to the other substitutes and thus the sales of the current product will come down to 0) (Supply curve is flat). In case we consider that the product only has imperfect substitutes, then the price will also increase along with quantity (Supply curve is upward sloping).

The answer to the second question is similar to the first one. Due to an increase in demand by younger generations for comforts, let's say expensive coffee, the demand curve for the coffee will shift towards right similar to the one given in the above diagram. As it does not have any perfect substitutes, the price and quantity will increase at the equilibrium.

The resources in an economy are allocated based on the needs of the consumer. If the demand for comforts and conveniences have increased by the younger generation, then the producer has an incentive to produce the goods and service falling in that category. Hence he/she will reallocate the resources from other products to comforts and convenience. The production of comforts will increase given the demand trend continues.

If the demand for comforts and conveniences remained high, then the producers have the incentive to differentiate their products in a way so as to charge a higher price. Hence, the market is providing a good incentive for innovation which will lead to the production of new goods and services belonging to the category in concern. It is a visible trend all around the world that the role of services has increased in recent times mainly because of the change of preferences of consumers toward the services. If there is a demand, the producer will be willing to supply and so if the demand for services stayed high, the economy might become more service-oriented.

The last question is concerned with the relation of % of spending and growth of the economy. The theories of growth attribute the growth of an economy to many factors like population growth, technological advancement, infrastructure etc. Savings are considered to be an important factor in growth. High savings mean high investment as investments in an economy is backed by savings of households. A country with low saving (high spending) will have a high aggregate demand but low investments which will have repercussions in the medium to long run. Thus, savings lead to high growth but it is not always the case. According to the paradox of thrift, if everyone in the economy decides to save at the same time, then the aggregate demand will fall and it will lead to a recession. Also, it is important for an economy to save less and spend more in times of recession in order to lift the aggregate demand. Thus, low saving will lead to low growth rate given the circumstances in an economy are normal.

I hope I answered the question. Please let us know in case of any reservation.

Edited- Let's take an expensive coffee as a product from the article. The article says that the younger generation is demanding this product more than the older generation. It means that the demand for Coffee has increased (the same argument will be made irrespective whether the prices stayed constant or increased). See the given diagram below.

Now there can be several reasons for the shift in demand for a product.

1. Income of consumer
2. Tastes and Preferences
3. The demand for related goods (Substitutes and Compliments). If the price of tea (substitute) has increased then the demand curve for coffee will shift to the right
4. Population size
5. The expected future price of the product

From the article, it seems there can be multiple reasons for the shift in the demand curve of coffee.

The most prominent reason is the change in tastes and preferences. The young generation has coffee at a higher hierarchy of preferences as compared to the older generation. Thus, the consumer's preferences are changing over the period of time and as the new consumers are entering the market, the preference of an average consumer is shifting towards coffee.

The second reason I think could also be that given coffee is a normal good (its demand increase as income increase) and if the income of younger generations is higher, then it makes sense that the consumers have more capacity to buy and hence they are buying more coffee.

I hope this answer's your query, Do let me know in case there is anything I can do for you.

Thanks for the feedback.