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Studying for a test? Prepare with these 5 lessons on Supply, demand, and market equilibrium.
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Video transcript
What I want to do in this video is think about the demand curve for two different products. So this is some laptop that's on the market. And this, let's just say, is the cheapest car that happens to be on the market this is actually a picture of a 1985 assuming this is the cheapest car on the market. So let's just think about their hypothetical demand curves right now So once again, on the vertical axis, we're going to put price, and on the horizontal axis, we put quantity, and then over here let me do it for the same thing So this is price, and this right over here is quantity. And both of them satisfy the law of demand if the price is really high the quantity demanded is going to be really low for the laptop and so it might be right over there and if the price is low the quantity demanded is going to increase. So, the demand curve might look something like that. And it doesn't have to be a curve, or doesn't have to be a line, it could be a curve or anything like that. So that is the current demand for the laptop All else equal, so we're not talking about shifting any of those other factors that we've been talking about in the last few videos. Now we can draw a similar demand curve for this very cheap automobile. If the price is high, very few people are going to want to buy it, and I'm not going to specify what the price is, but this is a general idea if the price is higher, fewer people are going to want to buy it If the price is lower, more people are going to want to buy it So this demand curve will also have the same shape from the top left to the bottom right it satisfies the law of demand. So once again, that is the current demand. Now let's think about how the demand for each of these goods might change depending on changes in income. So we're going to focus on the income factor the income effect, for this video and see how these 2 products might change. So let's just assume that income in the general population goes up. So for something like a laptop, wow, if more people are making more money especially in real terms they have more money to spend well for any given price point, at any given price point, there's going to be a higher quantity that's demanded. At any given price point, higher quantity demanded. And so if income goes up for this laptop, the demand will increase. And the way we show demand increasing is the whole curve shifts to the right so this right over here demand increased demand went up when income went up. And this makes complete sense and if income were to go down, demand would go down because people would have less money to buy something like a laptop. And this is the case for most goods we call things like this, when income goes up, demand goes up, whole curve shifts to the right income goes down, demand goes down, whole curve shifts to the left We call this a normal good. So this right over here is a normal good. Now let's think about what happens with the cheapest car on the market. And let's assume we're in a developed country where almost everyone has some form of a car. Now, what happens when income goes up? So people have more money but are they going to spend that money buying the cheapest car on the market? Well, in most cases, if income goes up generally, people say, well I have a little bit more money, maybe I'll buy a slightly nicer car. So, and maybe in particular the people who were going to buy this car at any given price point So this price point, the people who were going to buy the car will say Wait! I can now afford a better car! Why should I you know, this is not safe maybe or not as safe as the other cars, and I want to impress my friends from high school and all that, so something very strange might happen for this car, the demand for this car. It actually will decrease so the whole curve could shift to the left. So income is a very strange thing for this good because income increasing maybe people say, hey you know what, I could trade out of this good I could get a good that I'd rather have than just getting more of this thing right over here Demand went down. And goods like this, we call them inferior goods. And the general way to think about inferior goods are the goods that people will want to not own if they had more money they would want to buy, I guess, less inferior goods. Or another way to think about it is, if income were to go down, and more people are budget strapped and they can't afford the Mercedes-Benz or the BMW or even the mid-sized sedan anymore, so if income were to go down and things were getting tighter, more people would want this car more people would have to trade down to this because they're strapped, they're tightening their belts and so you'll have this strange situation where if income goes down, demand would go up for this thing So income goes down, demand goes up. Remember, we're talking about demand, we're talking about the entire shifting of the curve. At any given price point, the quantity demanded will go up. Because, this is, or we're assuming, is the cheapest car on the market. So, and likewise, if income were to go down for a normal good, it'll do what you'll expect, demand would go down. So this, an inferior good, does the opposite of a normal good when we're talking about the income effect, the inferior good will do the opposite of a normal good and that's because people want to trade out of it when their income goes up or they don't want to buy it or they want to buy something nicer. And when their income goes down, they'll say I have to buy this thing, so you know, let me just do it.