Y1 3) Demand and the Demand Curve

Summary

This video explains the fundamental concept of demand in economics, highlighting that demand refers to the quantity of a good or service that consumers are willing and able to buy at a certain price. The law of demand is introduced, which shows the inverse relationship between price and quantity demanded. The video also covers movements along the demand curve, shifts in demand due to non-price factors, and the roles of income, substitution effects, and external influences like advertising and population changes. It concludes with examples of normal and inferior goods, as well as complements and substitutes.

Takeaways

• 📊 Demand is the quantity of a good or service consumers are willing and able to buy at a given price and time period.
• ⚖️ The law of demand states that there is an inverse relationship between price and quantity demanded: as price increases, quantity demanded decreases, and vice versa.
• 📉 A demand curve is downward sloping, showing the inverse relationship between price and quantity demanded.
• 🔄 Movements along the demand curve occur due to changes in price: a price increase leads to a contraction of demand, while a price decrease leads to an extension of demand.
• 📜 The assumption of ceteris paribus (all other factors remain equal) allows for isolating the effect of price changes on demand.
• 💸 The income effect explains that as prices rise, purchasing power decreases, leading to lower demand.
• 🔄 The substitution effect suggests that as prices increase, consumers may switch to cheaper alternatives, reducing demand for the original product.
• 📊 Non-price factors (like population, advertising, substitutes, income, fashion, interest rates, and complements) can shift the demand curve left or right, independent of price changes.
• 🔁 Population growth or strong advertising can shift the demand curve to the right, while negative advertising or reduced population can shift it to the left.
• 👚 Goods can be categorized as normal or inferior: for normal goods, demand increases with income, whereas for inferior goods, demand decreases with rising income.

Q & A

What is the definition of demand in economics?

Demand is the quantity of a good or service that consumers are willing and able to buy at a given price in a given time period. For demand to exist, consumers must be both willing and able to make a purchase, making the demand effective.

What does the law of demand state?

The law of demand states that there is an inverse relationship between price and quantity demanded. As the price of a good increases, the quantity demanded decreases, and when the price decreases, the quantity demanded increases.

How is the inverse relationship between price and quantity demanded shown on a diagram?

The inverse relationship is shown using a downward-sloping demand curve. Price is represented on the Y-axis and quantity demanded on the X-axis. A price increase results in a movement up the demand curve, showing a decrease in quantity demanded, and a price decrease results in a movement down the curve, showing an increase in quantity demanded.

What does 'ceteris paribus' mean in the context of demand?

'Ceteris paribus' is a Latin phrase meaning 'all other things remain equal.' In the context of demand, it assumes that only the price of the good changes while all other factors that could affect demand remain unchanged.

What is the difference between a contraction and an extension of demand?

A contraction of demand occurs when the price of a good increases, leading to a decrease in quantity demanded. An extension of demand occurs when the price decreases, leading to an increase in quantity demanded. Both result in movements along the demand curve.

What are the income effect and the substitution effect in explaining the law of demand?

The income effect explains that as prices rise, consumers' purchasing power falls, leading to a decrease in demand because they can afford less. The substitution effect explains that as prices rise, consumers switch to cheaper alternatives, reducing demand for the more expensive good.

How do non-price factors affect demand, and how is this represented on a diagram?

Non-price factors shift the demand curve entirely. An increase in demand shifts the curve to the right, while a decrease shifts it to the left. These shifts occur independently of price, showing that at the same price level, more or fewer units are demanded due to changes in factors like population, advertising, or income.

What are some examples of non-price factors that can shift the demand curve?

Non-price factors include population changes, advertising, the price of substitutes, consumer income, fashion and tastes, interest rates, and the price of complementary goods.

What is the difference between normal and inferior goods in relation to income changes?

Normal goods are goods for which demand increases as consumer income rises, such as luxury cars or designer clothing. Inferior goods are goods for which demand decreases as income rises, such as fast food or public transportation.

How do complementary goods affect demand?

A complementary good is one that is often bought with another good. If the price of one good (e.g., printers) rises, the demand for its complement (e.g., printer ink) may decrease, shifting the demand curve for the complement to the left. If the price of the first good decreases, demand for its complement may increase, shifting the curve to the right.

Outlines

00:00

📊 Understanding Demand in Economics

This paragraph introduces the concept of demand in economics, explaining that it refers to the quantity of a good or service consumers are both willing and able to buy at a specific price during a given time. The law of demand shows an inverse relationship between price and quantity demanded, meaning that as price increases, demand decreases, and vice versa. The paragraph also introduces the demand curve, which graphically represents this relationship.

05:00

📉 The Law of Demand and Movements Along the Curve

This section elaborates on the law of demand using a demand curve. It describes how changes in price lead to movements along the demand curve, either decreasing or increasing quantity demanded. Price increases cause a contraction in demand, while price decreases cause an extension. The explanation relies on the assumption of 'ceteris paribus,' meaning all other factors remain unchanged, allowing for a clear analysis of price's effect on demand.

10:01

🔄 Income and Substitution Effects

This paragraph explains the two effects that justify the inverse relationship between price and quantity demanded: the income effect and the substitution effect. The income effect refers to the decreased purchasing power as prices rise, while the substitution effect explains how consumers switch to alternatives when the price of a good increases. Both effects contribute to the contraction or expansion of demand when prices fluctuate.

📈 Non-Price Factors Affecting Demand

Here, the text discusses how non-price factors influence demand by shifting the entire demand curve rather than just causing movement along it. When these factors increase demand, the curve shifts to the right, and when they decrease demand, it shifts to the left. Examples of non-price factors include population, advertising, and the availability of substitutes. Each factor can independently affect demand regardless of the price.

👥 Population, Advertising, and Substitutes' Impact on Demand

This paragraph breaks down how specific non-price factors, such as population growth, effective advertising, and the prices of substitute goods (e.g., Coke and Pepsi), shift the demand curve. A growing population or good advertising increases demand, while bad publicity or lower substitute prices reduce it. These factors cause the demand curve to shift left or right based on their influence on consumer behavior.

💰 Normal and Inferior Goods in Relation to Income

This section distinguishes between normal and inferior goods, explaining how income changes affect demand differently. For normal goods, higher income increases demand, shifting the curve right, while lower income decreases demand, shifting it left. In contrast, inferior goods, such as fast food or public transportation, see increased demand when incomes drop and reduced demand when incomes rise.

👗 Fashion, Tastes, and Interest Rates' Effects on Demand

Fashion and consumer preferences also impact demand. If a product becomes trendy, the demand increases, shifting the curve to the right, and vice versa. Interest rates affect goods often bought with borrowed money, such as houses and cars. Lower interest rates make borrowing cheaper, increasing demand, while higher rates reduce demand for these goods, shifting the curve accordingly.

🖨️ Complementary Goods and Their Prices' Impact

Complementary goods are discussed here, where the demand for one good is influenced by the price of another. For example, if the price of printers increases, the demand for complementary goods like printer ink decreases. Conversely, if the price of printers drops, demand for printer ink will rise, shifting the demand curve right. This section illustrates how interconnected goods impact each other's demand.

🔁 Summary of Demand Theory and Shifting vs. Movement Along the Curve

This final section summarizes demand theory, reiterating that movements along the curve are caused by changes in the price of the good itself, while shifts in the demand curve result from non-price factors. The importance of understanding both movements and shifts, as well as mastering these concepts for application in supply theory, is emphasized.

Keywords

💡Demand

Demand refers to the quantity of a good or service that consumers are willing and able to buy at a specific price in a given time period. The video emphasizes that demand in economics must be effective, meaning consumers must both desire and have the means to purchase the product. It is a central theme of the video, illustrated through the law of demand.

💡Law of Demand

The law of demand states that there is an inverse relationship between price and quantity demanded. As price increases, the quantity demanded decreases, and vice versa. This concept is fundamental in economics and is visually represented in the video through a downward-sloping demand curve.

💡Demand Curve

A demand curve graphically represents the relationship between the price of a good and the quantity demanded. In the video, the demand curve is shown as downward-sloping, illustrating the inverse relationship between price and demand. The video explains how price changes lead to movements along this curve.

💡Ceteris Paribus

Ceteris paribus is a Latin phrase meaning 'all other things being equal.' It is used in economics to isolate the effect of one variable, such as price, on demand. In the video, this assumption is key to understanding the law of demand, allowing for the analysis of price changes without interference from other factors.

💡Contraction of Demand

A contraction of demand occurs when the price of a good increases, leading to a decrease in the quantity demanded. This is a movement up along the demand curve, as shown in the video. It is directly related to the law of demand and demonstrates the inverse relationship between price and quantity demanded.

💡Extension of Demand

An extension of demand happens when the price of a good decreases, resulting in an increase in the quantity demanded. In the video, this is shown as a movement down the demand curve, and is also referred to as an expansion of demand. It further illustrates the law of demand.

💡Income Effect

The income effect explains how a change in price affects the purchasing power of a consumer's income. When prices rise, consumers can afford less, leading to a contraction in demand. Conversely, when prices fall, their income stretches further, increasing demand. This concept is used in the video to explain why the demand curve slopes downward.

💡Substitution Effect

The substitution effect occurs when a price increase for one good causes consumers to switch to cheaper alternatives. In the video, this effect is mentioned as a reason why demand decreases when the price of a good rises, reinforcing the law of demand.

💡Shift in Demand Curve

A shift in the demand curve happens when a non-price factor changes, such as population, income, or preferences, affecting demand at all price levels. In the video, shifts to the right indicate an increase in demand, while shifts to the left show a decrease, independent of price changes.

💡Non-Price Factors

Non-price factors, such as population, income, advertising, and substitutes, can influence demand and cause shifts in the demand curve. The video explains how these factors affect demand independently of the price, altering consumers' willingness and ability to buy goods or services.

Highlights

Demand is the quantity of a good or service consumers are willing and able to buy at a given price during a given time period.

For demand to exist in economics, it must be 'effective,' meaning consumers must be both willing and able to purchase the good or service.

The law of demand states that there is an inverse relationship between price and quantity demanded: as price increases, quantity demanded decreases, and vice versa.

The demand curve illustrates the inverse relationship between price and quantity demanded, typically shown as a downward-sloping line.

A movement along the demand curve happens when the price of the good changes, assuming all other factors remain constant (ceteris paribus).

When the price increases, there is a contraction of demand, while a price decrease results in an extension or expansion of demand.

The income effect explains that when prices rise, consumers' purchasing power diminishes, leading to reduced demand.

The substitution effect explains that when prices increase, consumers may switch to purchasing substitutes, reducing demand for the original good.

Non-price factors, such as population, advertising, substitutes, income, fashion, and interest rates, can shift the entire demand curve.

A shift in the demand curve to the right indicates an increase in demand, while a shift to the left signifies a decrease in demand.

Substitute goods, like Coke and Pepsi, affect demand: when the price of Pepsi rises, the demand for Coke increases and vice versa.

Normal goods experience increased demand when income rises, while inferior goods see reduced demand as income increases.

Interest rates can impact demand for goods like houses or cars, as higher rates make borrowing more expensive, decreasing demand.

Complementary goods, like printers and printer ink, show that a price increase in one (printers) can lead to reduced demand for the other (printer ink).

Understanding the distinction between movements along the demand curve (price changes) and shifts in the demand curve (non-price factors) is crucial for economic analysis.

Transcripts

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