Y1 3) Demand and the Demand Curve

hi everybody demand in economics is defined like this demand is the quantity of a good or service consumers are willing and able to buy at a given price in a given time period that definition is very important learn it word for word demand has to be effective in economics for it to exist by effective consumers have to be both willing and able to buy something for there to be demand in economics demand has to be effective we call it consumers are willing and able now when we study demand in economics there is a very interesting pattern of behavior when consumers spend their money and that is known as the law of demand this pattern and the law demand simply states that there is an inverse relationship between price and quantity demanded what does that mean it means that as the price increases quantity demanded decreases whereas if the price decreases quantity demanded increases there is an inverse relationship between price and quantity demanding when price goes one way quantity demanded goes the other way and we can show that relationship on a diagram using a demand curve like this now whenever we draw these curves we say curves there there's linear down sloping lines for simplicity purposes we must label the axis correct we're showing the relationship between price and quantity demanded here so price and quantity goes on the axis price on the y quantum yet our demand curve therefore is downward sloping because that shows the inverse relationship here now we can put all of this onto a diagram so let's take an initial price so at a price of p1 quantity demanded there is a q1 let's show this inverse relationship this law of demand so as the price increases so let's say from p1 to p2 this demand curve shows the inverse relationship quantity demand has decreased from q1 to q2 and similarly if price decreases let's say from p1 to p3 we can see that there is an increase in quantity demanded from q1 to q3 so the demand curve here clearly shows us this relationship this is a demand curve in economics it clearly illustrates the law of demand now to under to understand this law and to get to this law we make a fundamental assumption we assume satirist paribus when the price changes ceteris paribus means all other factors remain unchanged all other things remain equal that's what ceteris paribus means and by having that assumption we can get to the law of demand as a theory we can isolate the impact of price changes and see exactly the impact it has on quantity demanded on demand itself so when price changes to actually get to this law of demand theory we make this assumption which means that we move along the curve guys so when we increase price we move along the curve and that is called a contraction of demand that's very important a contraction of demand whereas when we decrease the price we see an increase in quantity demanded that's called an extension of demand an extension of demand another name for that is also an expansion of demand but you see we move along the curve when we change price assuming ceteris paris is here all other factors remain unequal anything else that can affect demand remains unchanged so when prices go up or down there is a change in quantity demanded shown by a movement along the demand curve very important that's how we show the change in demand there so that's all well and good we understand the law of demand we understand that there is this inverse relationship when prices go up quantity demand goes down there's a contraction of demand when prices go down quantity demanded increases there is an extension of demand we move down the demand curve five but why why is there this downward slope what explains the inverse relationship while there are two effects that explain it the income effect and the substitution effect let's take a price increase in both cases how does the income effect explain that when prices go up there is a contraction of demand there is a fall in quantity demanded well very simply as prices go up our income can't stretch as far the purchasing power of our income can't go as far therefore we are less able to buy our income maybe doesn't allow us to buy the same quantity of goods and services as before so our demand contracts we demand less that's the income effect what about the substitution effect why is prices go up do we demand less according to the substitution effect well as prices go up other goods and services become more price competitive so we switch our demand we switch our consumption towards buying those goods and services instead which is why demand contracts for this good or service and there's a decrease from q1 to q2 the opposite for a decrease in price the income effect and the substitution effect can still explain why as prices for quantity demanded increases our income stretches further and other goods and services become less competitive which is why we demand more of this one so we understand the basic law of demand when price increases quantity demanded decreases it contracts and we move up the demand curve if price decreases quantity demanded increases it extends and we move down the demand curve that's the basic law of demand the inverse relationship assuming cetera's parents but we know that there are clearly other factors that can affect our demand not just price when we drop the assumption of ceteris paribus we can allow non-price factors to affect demand how do we show the impact of that on a diagram well let's have a look non-price factors will shift the demand curve as this diagram clearly shows here so if a non-price factor that affects demand increases demand the demand curve will shift to the right from d1 to d2 whereas if a non-price factor reduces our demand the demand curve will shift to the left from d1 to d3 but crucially these non-price factors affect demand completely independent of price so at the same price you can see here that if the demand captures to the right there is more demand if the demand curve shifts to the left there is less demand at the same price so what are these non-price factors that can affect our demand independent of price well just remember pacific i've felt it wrong on purpose so then it all fits together so specific with an s but it works just remember pacific what are these factors then that can shift the demand curve independent of price well population clearly can affect demand if there is a greater population there'll be more demand for a certain good or service that america will shift to the right from d1 to d2 whereas if population decreases there'll be less demand from d1 to d3 independent of price advertising good advertising affects all willingness to buy something so good advertising will shift the demand curve from d1 to d2 increasing demand from q1 to q2 regardless of the price whereas if there is bad advertising so maybe a bad report or a bad news article about something the demand curve will ship left as we become less willing to buy from d1 to d3 the demand curve will shift substitutes price what is a substitute a substitute is a good that's a rival good to something else or it's a good that's in competition with something else so a good example of substitutes classic example coke and pepsi clearly substitute goods they're in rival competition with each other so let's say this is the demand curve for coke if the price of pepsi goes up more people are going to be willing and able to buy coke instead that's going to shift the demand curve for code from d1 to d2 whereas if the price of pepsi a substitute goes down more people want to buy pepsi less people will be willing and able to buy coke decreasing demand from d1 to d3 shifting the demand curve to the left from d1 to d3 here what about income well when it comes to income we need to make a distinction between normal goods and inferior goods normal goods are as incomes rise demand for them will increase so take things like you know luxury cars take things like fine dining or restaurant dining things like designer clothing these are all classic examples of normal goods when our income goes up demand for them will shift to the right from d1 to d2 whereas when our income decreases demand for cars demands for restaurant dining demand for designer clothing will all decrease or shift to the left from d1 to d3 inferior goods though have the opposite relationship inferior goods are as incomes go up demand for them will decrease whereas when incomes go down demand for them will increase what are some examples of inferior goods things like fast food public transport holidaying at home these are all good examples of inferior goods so for inferior goods as income goes up the demand for these inferiors will shift to the left from d1 to d3 whereas when incomes go down demand will increase we'll shift to the right from d1 to d2 so when we think income always think first is that a normal good or an inferior good and therefore if incomes rise or fall you know which way the demand curve will shift fashion and taste clearly will affect demand that will affect our willingness and potential our ability to buy but certainly our willingness if fashion changes towards a certain good or service it's going to make us buy more of it it's going to make us demand more of it at the same price shifting the demand curve to the right from d1 to e2 whereas if fashion moves away from a good or service the demand curve for the good will shift to the left from d1 to e3 interest rates can really affect the demand for goods or services if consumers need to borrow in order to buy it so takers like housing cars for example maybe even holidays a jewelry furniture these are all goods and services that consumers tend to borrow money in order to buy so if interest rates go down it makes it cheaper for consumers to borrow which will increase the demand for these goods or services whereas if interest rates go up it makes it more expensive to borrow that will reduce the demand for these goods and services shifting the demand curve from d1 to e3 whereas if interest rates fall demand for goods where consumers need to borrow and buy will increase from d1 to d2 we've also got the complements price what is a complement a complementary good is a good that's often bought with another so let's take printer ink printer ink is a compliment to printers you buy printers first and then you often buy printer ink so let's say that the price of printers goes up when the price of printers goes up the demand for printer ink will shift to the left it's not the price of printer ink that's changed it's the price of printers that's changed which causes the demand curve for printer ink to shift to the left in this case whereas if the price of printers went down the demand for printer ink would shift to the right the demand curve was shipped to shift to the right from d1 to e2 so that's a compliments price the idea that price of a complement can shift demand for another good either to the right or to the left so that covers demand theory fully crucially a movement along the curve will happen if the price of the good itself changes whereas if non-price factors affect demand for a good or service then we show a shift of the demand curve like this so get practicing with all these non-price factors no pacific well make sure you take all this down practice it master it become amazing at it and stay tuned for the next very important video where we do the same stuff for supply and the supply curve i'll see you then thanks for watching

Channel: EconplusDal

Views: 305,718

Keywords: econplusdal, econ, plus, dal, virang, econplus, economics, demand, demand curve, curve, income effect, substitution effect, income, effect, substitution, price, quantity, law of demand, law

Id: aH_XC6EAzXE

Length: 11min 9sec (669 seconds)

Published: Thu Nov 30 2017