Law of Demand Example of the law of demand
Law of Demand
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- In this video we're gonna talk about the law of demand
- which is one of the core ideas of micro-economics.
- And luckily for us, it is a fairly intuitive idea.
- It just tells us that if we raise the price of a product,
- that will lower the quantity demanded for the product.
- The quantity demanded will go down,
- and you can imagine the other side of that.
- If we lower the price of a product,
- that will raise the quantity demanded of that product.
- And the law of demand says, just kind of generally
- what we'll see in a few videos from now,
- that there are some exceptions to this.
- But to make this a little concrete,
- let's think about the demand for a certain product.
- And one thing I'm gonna clear here,
- and I want to take great pains to not mess this up,
- is that when we talk about the word DEMAND,
- in a formal economic sense,
- we're not talking about a quantity,
- we're actually gonna talk "all else equal",
- "ceterus perebus"
- all the relationship between price and quantity demanded.
- If we talk about an actual quantity,
- we should say the quantity demanded.
- So DEMAND vs QUANTITY DEMANDED,
- these are two different things.
- If it‘s a little confusing to you right now,
- hopefully by the end of this video
- the difference between demand and quantity demanded
- will become a little bit clearer,
- and definitely over the next few videos.
- Because in this video we're gonna focus on,
- how the quantity demanded changes relative to price.
- In future videos we'll talk about how the entire relationship,
- how demand changes based on different factors.
- But to make things concrete,
- let's say I'm about to release my science fiction book,
- space whatever..I don't know...the book I want to release..
- So I'm gonna release some e-book,
- And we've done some market study
- or we just know how the price is
- or how the demand is related to price,
- or price is related to demand.
- And we're gonna show that in a DEMAND SCHEDULE,
- which is really just a table
- that just shows
- how the price... and actually I made my first mistake.
- I just said how price relates to demand.
- I should say how price relates to quantity demanded,
- and how quantity demanded relates to price.
- So a demand schedule, it shows
- a relationship between price and quantity demanded.
- ALL ELSE EQUAL.
- So we're gonna have multiple scenarios here.
- So this column is for scenarios.
- This column let me put my price.
- This column I put my quantity demanded.
- So a scenario...
- Let's call this a scenario A.
- I could price my book at $2.
- And I'll get a ton of people downloading it at that price.
- So I will get 60,000 people
- download my book at that price my e-book.
- Scenario B, I could raise the price by $2.
- So it's now at $4 and then that kills off a lot of the demand.
- Now the quantity demanded goes down to
- 40,000 people downloading it.
- Then I go to scenario C.
- If I raise by another $2,
- so now I'm at $6,
- that lowers the quantity demanded to 30,000.
- I will do a couple more of these.
- Scenario D, I raise another $2.
- So I get to $8 now.
- Now the quantity demanded goes down to 25,000.
- And I'll do one more of these
- -See what color I haven't used yet-
- -I haven't used yellow yet-
- Scenario E, I raise it to $10.
- Now the quantity demanded let's just say it is 23,000.
- So this relationship,
- this shows the law of demand right over here.
- And this table that shows,
- how the quantity demanded relates to price and vice versa.
- This is what we call the DEMAND SCHEDULE.
- Now we can also, based on this demand schedule,
- draw a DEMAND CURVE.
- We're really just gonna plot these points and
- draw the curve that connects them
- because these aren't the only scenarios.
- Anything between them is also possible.
- We could charge $2.01 for the book.
- We could charge $4.50 for the book.
- And so that‘s what the demand curve captures a little bit better,
- because it’s a continuous curve and not just 5 points.
- So let's do that.
- Let’s graph it.
- And this is one of those conventions of economics
- that I am not a fan of,
- because people often talk about changing the price
- and how the quantity demanded changes from that.
- And in traditional...in most of math and science,
- the thing that you're changing
- you normally put on the horizontal axis.
- So if I was in charge of the convention of economics
- I would plot price on the horizontal axis right over here.
- But the way it's done typically
- is that price is done on the vertical axis.
- So you're used to seeing it
- in kind of the traditional class environment.
- I'll do the same.
- So we'll put price in the vertical axis
- and we'll put quantity demanded in the horizontal axis.
- And now the quantity demanded goes all the way up to 60,000.
- So that's a 10..20..30..40..50..60
- So it's 10 ... this is in thousands
- 20...30...sorry not 45...40...50 and 60
- and this is in thousands.
- And the price goes up to $10
- from $2 to $10.
- Let's say this is 2..4..6..8 and 10.
- So let's plot the scenarios.
- So Scenario A, price is $2
- 60,000 units are demanded.
- That is Scenario A, right over there.
- Scenario B, when the price is $4,
- 40,000 units are demanded.
- $4, 40,000 units that's right over there.
- That's Scenario B.
- Scenario C, $6, 30,000 units.
- Scenario D, $8, 25,000 units.
- $8, 25 is right about there.
- That looks like 25,000 right in between. That's close enough.
- So that right over there is Scenario D.
- And then finally Scenario E,
- $10, 23,000 units.
- So that would be something like that.
- That is Scenario E.
- And so we can actually have prices anywhere between them
- and maybe we can go even further.
- So this right over here.
- So if I were to draw the demand curve,
- it could look something like this.
- A demand curve would look something,
- -I'm trying to do my best to draw a straight continuous line-
- could look something like that.
- It could keep going on and on.
- And so these are two ways to show demand.
- So I'm just going back to what I said earlier.
- The quantity demanded is, all else equal, for a given price,
- how many units people are willing to download
- or buy of my e-book.
- When we talk about the demand itself,
- we're talking about this entire relationship.
- So this demand itself,
- is this entire demand schedule.
- Or another way to think of it is,
- is this entire demand curve.
- If demand were to change,
- we would actually have a different curve.
- This curve would shift
- or the entries in this table would shift.
- If the quantity of demand changes,
- we move along this curve.
- When you hold everything else equal
- and you only change price.
- So hopefully that makes that clear.
- When everything else is equal
- and you're only changing price,
- you're not changing demand.
- You're changing the quantity demanded.
- The demand, because everything else is equal,
- is this relationship.
- In the next few videos,
- we'll think about what does happen,
- when you do change some of those other factors.
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