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Main content
Current time:0:00Total duration:5:56
AP.MACRO:
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MKT‑2.B.1 (EK)
AP.MICRO:
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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 lists let's just say is the cheapest car that happens to be on the market this is actually a picture of a 1985 you go but we're just assuming it's the cheapest car in the market so let's just think about their hypothetical demand curves right now so once again in the vertical axis we're going to put price and the horizontal axis we put quantity quantity and then over here let me do it for the same thing so this is price 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 it might the demand curve might look something like that and it doesn't have to be a curve or it doesn't have to be a line it could be a curve it could be anything like that so that is the current demand for the laptop so this is the current current demand all else equals 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 could 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 even specify what the price is but this is a general idea of the price is higher if you were people going to buy it if the price is lower more people are going to want to buy it so it's demand curve will also have this shape from the top left to the bottom right it satisfies the law of demand so once again that is the current demand current demand now let's think about how 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 two products might change so let's just assume let's assume that income in the general population 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 at any given price point at any given price point there's going to be a higher there's going to be a higher quantity that's demanded at any given price point higher quantity demanded at any price point a 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 that 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 net laptop and this is the case for most goods and we call things like this so when income goes up demand goes up the whole curve shifts to the right income goes down demand goes down whole curve shift to the left we call this a normal good so this right over here is a normal normal good now let's think about what happens with the cheapest car on the market and let's assume that we are 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 oh I have a little bit more money now 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 at this price point the people who are going to buy the car well say wait I can now afford a better car why should I go you know this is not safe maybe or not foot safe as the other cars and and you know I want to impress my friends from high school and all of that so something very strange might happen for this car right for the demand for this car it actually will decrease so the whole curve could shift to the left the whole curve could shift to the left so income did a very strange thing for this good because in Krum increasing made people say hey you know what I could trade out of this good I could get a good that I would rather have than just getting more of this thing right over here demand went down and goods like this we call inferior Goods inferior 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 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 incomes were to go down and things we get tighter more people would want this car more people would have to trade down to this because they're there they're strapped they're tightening their their belts and so you would have the strange situation where if income goes down demand would go up for this thing so income income goes down demand goes up and remember when 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 the or we're assuming it's the cheapest car on the market so and likewise if income were to go down for a normal good it would do what you expect demand would go down so this is an inferior good does the opposite of a normal good and that's when when we're talking about the income effect this is important when we're talking about the income effect and 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 they want to buy something nicer and when income goes down they say oh I have to buy this thing so let me just you know let me just do it