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AP®︎/College Macroeconomics
Course: AP®︎/College Macroeconomics > Unit 1
Lesson 4: Demand- Law of demand
- Price of related products and demand
- Change in expected future prices and demand
- Changes in income, population, or preferences
- Normal and inferior goods
- Change in demand versus change in quantity demanded
- Lesson summary: Demand and the determinants of demand
- Demand
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Law of demand
The law of demand states that when the price of a product goes up, the quantity demanded will go down – and vice versa. It's an intuitive concept that tends to hold true in most situations (though there are exceptions). The law of demand is a foundational principle in microeconomics, helping us understand how buyers and sellers interact in the marketplace. Created by Sal Khan.
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Yes! Thank you! I can't tell you how much that price being on the y-axis bugged me, especially when my professor would relate math to economics. Price is the independent (x) that determines the Q demanded (y). Why do economists have to make things so complicated?(262 votes)
The reason dates back to about the end of the 19th century when mathematical economics was really starting to coalesce (it didn't fully until the 1940's). There was an enormous debate over what the independent variable was in the real world -- do consumers and producers pick quantities they want to buy and sell, and then adjust prices accordingly, or do they decide on prices they're willing to take in a bargain, and henceforth adjust the quantity on offer of both sides of the deal.
In the theory of perfect competition, remember, we assume people are mostly price-takers in a large integrated market (one cannot haggle over the price of a pack of gum, nor can 7-11 influence the price much because of all the competition.
Yet using quantity as the independent variable is a historical hold-over from days when economists felt quantity of goods was primary. The fact opens the door to an important history in economic thought -- when everything started, physical goods were the primary focus, as everyone thought (before the supply and demand curves you learned were developed) that value came intrinsically from things coming from the Earth, or being infused with physical value by physical labor. It took several hundred years for the best thinkers to begin to realize value is a psychological construct created by marginal tradeoffs among goods.
And we're stuck with an annoying caveat in mathematical conventions.(369 votes)
What is cetrus paribus?(21 votes)
Cetaris paribus, or, caeteris paribus, is a Latin phrase, literally translated as "with other things the same," or "all other things being equal or held constant. (Wikipedia)(9 votes)
Suppose there is very high demand for a product, naturally people are gonna be buying it no matter what the price is. Isn't that contradicting "The Law of Demand"?? Or is it the case of "all things NOT being equal"??(10 votes)- The kind of good that you're talking about is called a price-inelastic good. That means that even as the price of the good changes, the demand for it stays about the same, and people would still buy it at pretty much any price with the quantities being purchased varying only slightly. An example is oil: even when the price of oil soars ridiculously high, we still tend to demand and consume roughly the same amount of oil.
If we're talking about a good that simply has a high demand, depending on its price elasticity, what you described could still be true. If a good becomes in high demand, then at every price, we'd buy more of it than we did before, but there's still be prices high enough where we'd buy zero of the good- it would just be at a higher price, and we'd generally be more willing to pay for that good up until a point. This is what would happen if an advertisement for peaches came out that I really liked: I'd probably end up buying more peaches, and I'd probably be happier to pay a slightly higher price for peaches, but there'd still be a point where peaches would just be so expensive that I wouldn't buy them no matter how awesome the aforementioned advertisement was.
I'd suggest watching the videos on price elasticity of demand for a clearer understanding of the topic. It's also pretty interesting to know that there are 2 cases where the Law of Demand isn't obeyed, and that's in the case of special types of goods called Veblen goods and Giffen goods. Research them if you have the time to, they're really interesting to learn about! Hope this helped. :)(31 votes)
What's the difference between quantity and quantity demand?(12 votes)- What's the difference between quantity and quantity demand?
I think quantity is changed when the entire relationship of the scenario changes oppose to quantity demand only change when it is related to the price.(3 votes)
Aren't demand curves always supposed to be concave? Sal uses numbers that disregard price elasticity, where the when price increases, the quantity demanded *should* be decreasing faster the higher the price gets, not slower.(9 votes)
The demand schedule indicates that Sal's ebook is very desirable. Hence, even though the demand is dropping as the price is rising, people still want to buy his ebook at the higher prices. This shows why such graphs are useful when deciding on what price to sell: If I was Sal and this demand curve was real, I would price this ebook at somewhere over $10 since even at the higher prices it is making more money. At some point above $10 though, the quantity demanded would drop off much faster indicating that the price is set too high.(6 votes)
- In the real world how is the quantity demanded with a change in price estimated to then plot a demand curve ? Is it by surveys or else by using historical data ?(10 votes)
Sal was just presenting an example to build off of, in the real world if you where setting your price for your book. You would look at your competitors similar books and price points. Estimate how many sales they have and set your price accordingly. Here is the definition from Investopedia;
The law of supply and demand is not an actual law but it is well confirmed and understood realization that if you have a lot of one item, the price for that item should go down. At the same time you need to understand the interaction; even if you have a high supply, if the demand is also high, the price could also be high. In the world of stock investing, the law of supply and demand can contribute to explaining a stocks price at any given time. It is the base to any economic understanding.(7 votes)
- Could someone please explain what the difference between Quantity Demanded and Demand is?(3 votes)
Quantity Demanded is the number of units of a good that people want to buy at a given price. Demand is the actual function of price that determines quantity demanded.(9 votes)
- Demand vs quantity of demand: if there is a hurricane and everyone scrambles to buy bottled water, does that affect demand or quantity of demand? Also, is demand just the aggregate demand of the market?(3 votes)
- If there is a hurricane, the entire demand curve will shift to the right, because for any given price, the quantity demanded would increase. Demand is the entire curve, which basically means that it is the quantity demanded for any given price.(6 votes)
- Does the Demand Curve ever move up and down along the y-axis? If so, what are these factors?(4 votes)
It's called a shift... and rather going up and down, the shift is said to go left and right. The curve shifts to the left when the the value of price goes down, meaning you can purchase less for the same price. It goes to the right when you can purchase more for the same price. Factors include income, presence of a substitute, changes in price of goods that go together (increase in price of flour might lower the demand for cake), having expectations on the product, change in number of consumers. :)(3 votes)
- In the video, the demand curve sharply curves up, so if you want to make more money then you should raise the price, right?(2 votes)
Great question! First, this question will be addressed in future videos--demand alone tells us little about markets, we need to consider supply as well. Second, consider this example: You are a bubble gum company executive and someone asks you why your firm doesn't raise prices higher and higher, since higher prices lead to higher profits? (Right?) Think through what you would expect to happen if you raised prices higher and higher? Would you earn higher profits, necessarily? Hmmm. Let's watch the next video while keeping this scenario in mind.(4 votes)
Video transcript
In this video, we're going to
talk about the law of demand, which is one of the core
ideas of microeconomics. And lucky for us, it's
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. Quantity demanded will go down. And you could 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
this just kind of generally. What we'll see in a
few videos from now is that there are some
exceptions to this. But to make this
little concrete, let's think about the demand
for a certain product. And one thing I
want to clear here, and I'm going to go
through 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
going to talk, all else equal, ceteris
paribus, the relationship between price and
quantity demanded. If we talk about
an actual quantity, we should say the
quantity demanded. So demand versus
quantity demanded. These are two different things. And 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 going to focus on how
the quantity demanded changes relative to the 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
that I want to release. So I'm going to
release some ebook. And we've done
some market study, or we just know how the
demand is related to price or the price is
related to demand. And we're going to show that
in a demand schedule, which is really just a table that
just shows how the price-- and, actually I just 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 demand schedule, it shows
a relationship between price and quantity demanded,
all else equal. So we're going to have
multiple scenarios here. So this column, let
me do my scenarios. In this column, let
me put my price. In this column, I put
my quantity demanded. So scenario, let's
call this 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 ebook. Scenario B, I could
raise the price by $2. So it's now $4. And that kills off
a lot of the demand. Now the quantity
demanded goes down to 40,000 people downloading it. Then I can go to scenario C,
if I raise it by another $2. So now I'm at $6. Now that lowers the
quantity demanded to 30,000. I'll 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. Let me see, what color
have I not used yet. I haven't used yellow yet. Scenario E, if I
raise it to $10, now the quantity demanded,
let's just say, is 23,000. So this relationship 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 a
demand schedule. Now we can also, based
on this demand schedule, draw a demand curve. And really, we're just
going to plot these points and draw the curve
the connects them. Because these aren't
the only scenarios. Anything in between is possible. We could charge
$2.01 for the book. We could charge for
$4.50 for the book. And so that's what the demand
curve captures a little bit better, because it's a
continuous curve, not just five 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. And so you're used to seeing it
in kind of a 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 our quantity demanded
goes all the up to 60,000. So let's see, that's
10, 20, 30, 40, 50, 60. So that's 10-- this is in
thousands-- 20, 30, 40-- sorry, not 45-- 40, 50, and 60. And this is in thousands. And then the price goes
up to $10, from $2 to $10. So 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. And that's right over there. That's scenario B. Scenario C, $6, 30,000 units. Right over there, scenario C.
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 it might be
something like that. That is scenario E. And so we could
actually have prices anywhere in between that. And maybe we could
even go further. So this right over here. So if I were to draw
the demand curve, it could look
something like this. The demand curve
would look something-- I'm trying to do
my best to draw it as a straight continuous line--
could look something like that. And it could keep
going on and on. And so these are two
ways to show demand. So 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 ebook. 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 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-- so we move along this curve when
you hold everything else equal and you only change price. So hopefully that
makes it 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.