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Example of the law of demand. Created by Sal Khan.
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.