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How changes in the price of related goods can shift demand. Created by Sal Khan.
Video transcript
We have talked a little bit about the law of demand which tells us that, all else equal, if we raise the price of a product, then the quantity demanded for that product will go down. ..common sense. If we lower the price, the quantity demanded will go up. And we will see so in a few special cases for this. What I want to do in this video is focus on these other things that we've been holding equal, the things that allow us to make this statement, that allow us to move along this curve and think about if we were to change one of those things that we were otherwise considering equal, how does that change the actual curve? How does that actually change the whole quantity demanded price relationship? And so the first of these that I will focus on: the first is the price of competing products. The Price of Competing Products. [WRTING] So if you assume that the price of... actually, I shouldn't say Competing Products, I will say the price of Related Products because [WRITING] we will see that they are not all competing. Price of Related Products ... is one of the things that we are assuming is constant when we, it‘s been held equal when we show this relationship. We're assuming that these other things aren't changing. Now what would happen if these things changed ? Well, imagine we have other, say other ebooks' price goes up. [WRITING] The price of other ebooks go up. So what will that do to our price quantity demanded relationship ? If other ebooks' prices go up, now all of a sudden my ebook, regardless of what price point we're at, at any of the price points, my ebook is going to look more desirable. At $2, it is more likely that people will want it, more people will want it because the other stuff's more expensive. At $4, more people will want it. At $6, more people will want it. $8, more people will want it, $10 more people will want it. So if this were to happen, that would actually shift the entire demand curve to the right. So it would start to look something like this... it would look something like that. We'll call that Scenario 1. That is Scenario 1. And these other ebooks, we can call them substitutes for my product. So this right over here... These other ebooks, these are substitutes. [WRITING] If, people might say, oh you know that other book looks kind of comparable, if one is more expensive and one is cheaper, maybe I'll read one or the other. So, in order to make this statement, in order to stay along this curve, we have to assume that this thing is constant. If this thing changes, this is going to move the curve. If other ebooks prices go up, it will probably shift our curve to the right. If other ebooks‘ prices go down, that will shift our entire curve to the left. So this is actually changing our demand, it’s changing our whole relationship. So it‘s shifting demand to the right. Let me write that, so this is going to shift Demand... [WRITING] so the entire relationship: Demand to the right. [WRITING] I really want to make sure you have this point clear. When we hold everything else equal, we're moving along a given demand curve. We are essentially saying: the demand, the Price Quantity demanded relationship is held constant and we can pick a price and we'll get a certain quantity demanded. We are moving along the curve. If we change one of those things, we might actually shift the curve. Once we change this demand schedule, which will change this curve. Now if we...there are other related products, they don't just have to be substitutes. So for example, let's think about Scenario, a Scenario 2. Or maybe the price of a....the price of a Kindle goes up, [WRITING] so the price of a Kindle...let me write it this way: [WRITING] Kindle's price goes up. [WRITING] Now the Kindle is not a substitute. People don't either buy an e-book or they won't either buy my ebook or buy a Kindle. Kindle is a complement, you actually need a Kindle or an Ipad or something like it in order to consume my ebook. So this right over here, this right over here is a complement. It is a complement. [WRITING] So if a complement's price becomes more expensive, and this is something that... one of the things that people might use to buy my book, then it would actually, for any given price, lower the quantity demanded. So in this situation, if my book is $2, since fewer people are going to have Kindles, or maybe they have used some of their money already to buy the Kindle, they're gonna have less to buy my book or just fewer people will have the Kindle. For any given price, it’s going to lower the quantity demanded. For any given price. And so essentially, it will shift, it will change the entire demand curve. It will shift the demand curve to the left. So this right over here is scenario 2. And you can imagine the other way, if the Kindle's price went down, then that would shift my demand curve to the right. If the price of substitutes went down, then that would shift my entire curve to the left. So you can think about all these scenarios. And actually I encourage you to, think about and draw them yourselves, think about products... could be an ebook or could be some other type of product and think about what would happen. Well (1) one, think about what the related products are, the substitutes and potentially complements and then think what would happen as those prices change. And always keep in mind, the difference between demand which is this entire relationship, the entire curve, that we can move along if we hold everything else equal and only change price, and quantity demanded, which is a particular quantity for a particular price holding everything else equal.