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RISK PREMIUM: This has two very closely related uses. First, it's what risk averse people are willing to pay to avoid a risky situation. For example, if you would be equally happy with a guaranteed $900 or a 50-50 chance of getting either $500 or $1,500, then you're risk premium is $100. Second, it's the extra percentage points added to an interest rate to compensate for the risk of a loan. As a general rule, each 1 percent chance of default on a loan adds a risk premium of about 1 percent to the interest rate.
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                           BUYERS' EXPECTATIONS, DEMAND DETERMINANT: The expectations that buyers have concerning the future price of a good, which is assumed constant when a demand curve is constructed. Buyers' expectations are one of five demand determinants that shift the demand curve when they change. The other four are buyers' income, buyers' preferences, other prices, and number of buyers. The decision to purchase a good today depends on expectations of future prices. Buyers seek to purchase a good at the lowest possible price. If they expect the price to rise in the future, they are inclined to buy more now. If buyers expect the price to decline in the future, they are inclined to buy less now.Looking to the FutureBuyers make buying decisions based on a comparison of current and future prices. They are motivated to purchase the good at the lowest price possible. If that lowest price is the one existing today, then they will buy today. If that lowest price is expected to occur in the future, then they will wait until later to buy.Consider the example of Wacky Willy Stuffed Amigos, a cute and cuddly line of stuffed creatures. Buyers decide how many Stuffed Amigos to buy, at a given current price, based on their expectations of future prices. - Price Going Higher: Suppose that news media throughout the country report on the prospects of a worldwide shortage of stuffing, the same sort of stuffing used to stuff Wacky Willy Stuffed Amigos. Every expert interviewed projects that the higher stuffing prices will most assuredly cause an increase in the price of Stuffed Amigos. The price increase has not yet occurred, but it most assuredly will occur. Everyone expects it to occur. With this news, anyone pondering the purchase of Wacky Willy Stuffed Amigos will be inclined to make their purchase now, without delay. As such, the current demand increases.
- Price Going Lower: Alternatively, suppose that The Wacky Willy Company, the firm that produces Wacky Willy Stuffed Amigos announces that it has developed a new production technique, that when implemented will allow them to sell Stuffed Amigos at half their current price. This news is greeted enthusiastically by Stuffed Amigos collectors. They expect to purchase Stuffed Amigos at a lower price in the near future. With this news, anyone pondering the purchase of Wacky Willy Stuffed Amigos today will likely postpone their purchase until later, at the lower price. As such, the current demand decreases.
Shifting the Demand Curve| Buyers' Expectations | 
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A change in buyers' expectations causes the demand curve to shift. This can be illustrated using the negatively-sloped demand curve for Wacky Willy Stuffed Amigos presented in this exhibit. This demand curve captures the specific one-to-one, law of demand relation between demand price and quantity demanded. Buyers' expectations are assumed to remain constant with the construction of this demand curve.Now, consider how changes in buyers' expectations shift the demand curve. - Expecting Higher Prices: If buyers expect that the price of the good will be increasing in the future, they are likely to buy more today. This causes an increase in demand and a rightward shift of the demand curve. Click the [Expect Higher] button to demonstrate.
- Expecting Lower Prices: If buyers expect that the price of the good will be decreasing in the future, they are likely to buy less today. This causes a decrease in demand and a leftward shift of the demand curve. Click the [Expect Lower] button to demonstrate.
The Financial Power of ExpectationsBuyers' expectations (especially when combined with sellers' expectations) play a critical role in the markets for numerous goods. At the very top of this list is the whole assortment of financial markets, especially the stock market. Those who buy and sell corporate stock do so largely based on expectations of future stock prices.For example, Winston Smythe Kennsington III, noted Shady Valley financial guru, might be willing to pay $50 each for a few thousand shares of OmniConglomerate, Inc. stock today if he expects that the price will exceed $50 in the future. Alternatively, he might be inclined to sell his shares of OmniConglomerate, Inc. stock today if he expects that the price will fall below $50 in the future.
Recommended Citation:BUYERS' EXPECTATIONS, DEMAND DETERMINANT, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2014. [Accessed: March 7, 2014].
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November 2013
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BEIGE MUNDORTLE
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Today, you are likely to spend a great deal of time browsing through a long list of dot com websites looking to buy either a weathervane with a chicken on top or a flower arrangement with daisies and carnations for your uncle. Be on the lookout for poorly written technical manuals.
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