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Current time:0:00Total duration:5:19

AP Micro: MKT‑3 (EU), MKT‑3.B (LO), MKT‑3.B.1 (EK)

I sensed some confusion
coming out of the last video. And for your good, so I
thought I would do another one. So let's make, let's
assume that there's three cars in the
market, and what I want to do with this is I
sense that some people thought that I was suggesting that a car
in general is an inferior good, and that's not
what I was saying. I was saying, if we
lived in a reality where everyone owned a car and
a car was a necessity for life, and that is true in much
of the developed world, I was saying that the
cheapest car in the market might be considered
an inferior good. And to think about
that, let's just think about the
entire population. So let's say this
line, this line represents the entire
population in our place, in our developed country,
where everyone owns a car. And let's say, let's represent
this car with a blue. So let's say maybe 1/3 of the
people right now have that car. Now, let's say a good
chunk of the people have this midsize sedan,
this is probably the car that most people would like to
have, it's a little bit safer, it's a little bit larger,
it's a more powerful engine. And so this is where
most people are sitting. And then you have this
ultra, this kind of luxury, you have this luxury
car, Rolls Royce maybe. And so that is a
very small segment. So this end of the line is
the poor, in our population. This is the rich
right over here. So this is at some
given income level, and maybe we could say this
is true at a particular price point. But what we're going
to talk about is the general impact
on demand-- so on the entire curve at
any given price point, always assuming that this
is the most expensive, this is in between, and
this is the least expensive. Now, what happens if
income goes up from here? Well, the very
poorest, they're not going to be able to
necessarily just trade up to this midsize sedan
yet, although they maybe have more income
for other things or maybe they can get a
nicer version of this. But for the most
part, they're still going to be driving this car. But at kind of the
boundary right over here, if the incomes do
go up, there will be people who now could
afford the mid-size car, and that's what they want. And so these people might
start buying the midsize car. And then what will happen
over here, well, maybe there's a few people at the
boundary over here, they now have the money to
afford this very expensive car, and it suits their tastes. And so they also, a very small
proportion, also grows there. So what happened here? When income went
up, the quantity demanded at a
particular price point for this smallest car went down. But the demand for this
midsize car went up, it took a much bigger
chunk out of this blue than a chunk was taken
out of it by the orange, and also the demand for this
very expensive car went up. And that was at a
particular price point, but assuming that this
is the most expensive, this is the middle, and this
is the cheapest expensive, this would be true of
probably any price point. And so we have this phenomenon
that when income went up, the quantity demanded
at multiple price points for this car-- so let me
draw its actual demand curve. So this car right over here,
this is price, this over here is demand. If its old demand curve
looked something like this, we're saying-- and maybe when
we thought about this at first, we're thinking of
the price point right over here, we notice
when income went up, at that particular price
point, the quantity demanded went down, and that'd
be true pretty much any price point, assuming that this
is always the cheapest car. So at any price point, you
would have a decrease in demand. Remember, when we talk
about a decrease in demand, we're talking about a
shift of the entire curve, we're not talking about just
one particular quantity. Now, there's another interesting
question that was asked, and I think it was a very
nice and subtle thing to think about. I keep drawing these
shifting demand curves, and if at least I understand
the question properly, the question is
well, does the curve, when it shifts, does it
necessarily shift perfectly or does sometimes it change? Does it shift more at one
price point or another? And the simple answer is it can. In fact, in very few
circumstances would it probably be a perfect shift. Depending on the
price point you're at, it would probably shift
a little bit different. So the actual shape
of the curve might change while it's shifting. But anyway, going back to this,
so we see this cheap car right here had the unusual property
that when incomes went up, the demand curve
shifted to the left. And that's why we call
this an inferior good. These other two cars when--
so that's price, and this is demand-- these other two
cars when income went up-- so if this was the demand curve
at first-- when income went up, demand went up. The whole curve got shifted to
the right, so they are normal. So these are normal goods.

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