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Thinking about a demand curve in terms of quantity driving price. Created by Sal Khan.
Video transcript
Voiceover: In all of our conversations about demand curves so far, I've been generally talking about price driving quantities. So for example, we've been saying, using say this demand curve right here for a new car in terms of how many would be sold per day, we would say things like, "Well look, if we price it at $60,000 per car," this is in thousands of dollars. "If we price it at $60,000 per car, "we are going to sell one car. "If we price it at $50,000 a car, "we are going to sell two cars." The way that I've been talking about it is given a price, how many are we actually going to sell? What I want to do in this video is think about it the other way around. We're going to look at the exact same demand curve, the exact same relationship between price and quantity, but we're going to conceptualize it in our heads in a slightly different way. We're going to think about it in terms of quantity driving price. To think of it that way, imagine that we are the producers of this given model of a new car. We go the other way. We don't say, "How many will we sell "at a price of $60,000?" Or, "How much will we sell at a price of $50,000?" We'll go from the point of view of what if we only produce one car a week? If we only produced one car a week, how much could we get for that car? Let's say somehow you're able to figure that out. You're able to read people's minds or you have some type of a market study. When you ask that question you're like, "Look if you only allowed one car to be sold each week, "you determine that in that week there "is going to be somebody, "somebody's going to think that it's worth "$60,000 to buy that car." That person, they're willingness to pay, that person is going to be willing to trade $60,000. They're going to be willing to forego what else they could have bought for that $60,000 and instead they want that car. Then you would plot that point right over there. If you only had one unit, you could sell it for $60,000. Now let's go, let's keeping asking ourselves for more units. Let's say, what if we wanted to sell two units? Well, if you wanted to sell two units, you could definitely sell one unit for $60,000, assuming that you could get that first person, but that second person, this might have been the person that just wants a car so badly it just resonated with them in some way. For that second unit, the second person who is going to need to buy your car, might not be as excited about it. That second person will only be willing to forego $50,000. That second person would be willing to forego 50. So if you wanted to sell two units, if you insist on selling two units, and if you're assuming you're going to give the same price for everyone. We'll talk about in the future how you might give different prices to different people. Assuming you want to give the same price to everyone, you're going to have to sell your car for $50,000. Now clearly that first person is definitely going to jump at it. They're going to be able to get the car for more than they were willing to pay. More than what it was worth to them. More than the benefit for them, but if you want two people, now you're going to have to set this up for $50,000. Now the same logic. Now what if we want to sell three cars? What if we want to sell three cars a week? Well, if we price it at $50,000, we'll definitely get those first two, but the third person might not jump. The third person isn't going to be as excited about it or need it as much as these first two. So you do a market study or you're able to read people's minds. You're like, "Look the third person, "for the market, the marginal benefit." Let me write this word down. The marginal benefit. The marginal benefit for the next unit, the next unit is going to be $40,000. To get that next buyer, and it could be multiple buyers buying each unit or it could be one buyer buying all of the units. Maybe it's some type of a car rental company saying, "Oh, we don't need to get ... For three "of these cars I'm not as excited about it anymore. "My marginal benefit is lower." This is really the same marginal benefit that we talked about when we talked about the PPF, the Production Possibilities Frontier. In that, we talked about it very explicitly in terms of trade off, in terms of opportunity cost. Here we're measuring the marginal benefit in terms of price, but price really can be viewed as a foregone opportunity. If you spend $40,000 on this car, you're making the decision not to spend $40,000 on something else. A down payment on a house or a nice boat, or whatever else it might be. So really what we're doing, is at any point in this curve, this really is the marginal benefit for that next buyer. That marginal benefit to the market of that next unit of whatever you are producing. This is a very different way of viewing the exact same demand curve. Before we said, "Okay, if we want to price "it at $50,000, how many are we going to sell?" Now we're saying, "If we want to sell only two units, "where can we price it?" We can price it at $50,000. If we want to go from two to three units, we're going to have to price it at the marginal benefit of that third unit to the market and it could be the marginal benefit to that next consumer. Convincing that next consumer to say, "Hey it is worth it to buy this car. "Let's price it at $40,000." I'm going to leave you there in this video, but what I'm going to think about is depending on where you price it, let's say that we decide that we want to sell four units every week. So we say, "Well look, to get that fourth "person to buy this car, we have to price the car "at $30,000." What we're going to talk about in the next video is if you did that, if this is where you decide to price it so that you can sell four units, these other people got really good deals. The first unit could have gone for much more. The second unit could have still also gone for a good bit, not as much as the first unit. The third unit could have gone for a little bit less than the second unit, but still more than what you ended up selling things for. We're going to talk about this idea right over here that some of these consumers are getting more for their money than what they have to pay, or at least in their own minds they are.