Demand Curve as Marginal Benefit Curve

Summary

In this video, the concept of demand curves is re-explored by focusing on quantity driving price instead of price driving quantity. Using a car market example, the speaker explains how producers determine price based on the quantity of cars produced. For each additional car, the willingness of consumers to pay decreases, reflecting the marginal benefit. The speaker contrasts this approach with earlier discussions and highlights how some consumers may receive greater value than what they pay, setting the stage for further discussion on consumer surplus in future videos.

Takeaways

• 💡 The video discusses demand curves, traditionally focused on price determining the quantity sold, but introduces an alternative view where quantity drives price.
• 🚗 Using the example of car sales, the speaker demonstrates how price changes based on how many units are sold and the corresponding willingness of consumers to pay.
• 🔄 The concept of marginal benefit is introduced, where each additional unit sold has a lower marginal benefit or price point to the buyer.
• 👥 If only one car is sold, the highest price that a buyer is willing to pay ($60,000) is achievable. As more cars are sold, prices must decrease to attract additional buyers.
• 💲 For two units to sell, the price must drop to $50,000, and the process continues, with the price dropping for every additional unit sold.
• 📉 Marginal benefit measures the value the next consumer places on the product, and this influences pricing strategies when trying to increase sales volume.
• 🔍 The video contrasts two perspectives on demand: pricing based on quantity sold and adjusting price to increase the number of units sold.
• 🛠 The concept links to opportunity cost—buyers weigh what they give up when purchasing the car instead of something else.
• 💬 The video hints at future discussions on consumer surplus, where early consumers could have been willing to pay much more than the price set to sell higher volumes.
• 🧠 This shift in thinking about demand curves allows producers to better understand pricing strategies, particularly in maximizing the number of units sold while considering marginal benefits.

Q & A

What is the main difference in approach discussed in the video about demand curves?

The main difference in approach is that the video shifts from looking at price driving quantity to considering quantity driving price. Instead of asking how much will be sold at a given price, it explores how high the price can be set for a specific quantity.

How does the speaker use an example of car sales to explain the concept?

The speaker uses the example of pricing cars at different levels ($60,000, $50,000, etc.) to explain how the price affects the quantity sold. For instance, if only one car is produced, it could be sold at $60,000, but to sell two cars, the price would need to drop to $50,000.

What is meant by 'marginal benefit' in the context of the video?

Marginal benefit refers to the additional value or willingness to pay by the next consumer for the next unit of the product. For example, the marginal benefit of the second car might be $50,000, while the marginal benefit of the third car is $40,000.

Why is the willingness to pay different for each buyer in the example?

The willingness to pay varies because each buyer values the car differently based on their personal needs, preferences, and how much they are willing to forego in terms of other purchases.

What happens to the price if a producer wants to sell more units of the car?

If a producer wants to sell more units of the car, the price must be reduced to match the marginal benefit of the next buyer. For example, to sell a third car, the price may need to drop to $40,000 to attract that third buyer.

What does the speaker mean by 'convincing the next consumer to say it is worth it'?

The speaker means that to sell an additional unit, the price must align with what the next consumer considers a fair trade-off for the product. This consumer will buy the car only if the price meets or is below their perceived value of the car.

How does the concept of 'foregone opportunity' relate to price in this discussion?

Foregone opportunity refers to what consumers give up by choosing to spend their money on the car rather than on other potential purchases. Price represents the cost of this trade-off, making it a measure of opportunity cost.

What is the significance of the Production Possibilities Frontier (PPF) mentioned in the video?

The Production Possibilities Frontier (PPF) is significant because it helps illustrate trade-offs and opportunity costs, which are similar to the marginal benefit concept used in this video. The PPF shows how resources can be allocated between different goods, similar to how consumers allocate their spending between goods based on marginal benefit.

What is the implication of pricing a car at $30,000 to sell four units?

Pricing a car at $30,000 to sell four units implies that while the fourth buyer values the car at $30,000, earlier buyers (e.g., the first and second) would have been willing to pay much more, resulting in those buyers getting a better deal than their marginal benefit suggests.

What concept will the speaker discuss in the next video?

In the next video, the speaker will discuss the concept of consumer surplus, where some consumers get more value (or surplus) from their purchase than what they paid for, especially when the price is set lower than what some consumers were willing to pay.

Outlines

00:00

🔄 Reframing Demand Curves: Quantity Driving Price

This section introduces a new way of thinking about demand curves. Instead of price determining the quantity sold, it explores how the quantity produced can influence the price. Using an example of a new car, the video shifts the perspective: instead of asking how many cars are sold at a certain price, it asks how much the producer can charge if only a certain number of cars are available. The idea is to understand how people's willingness to pay, or their 'marginal benefit,' affects pricing when the number of units produced is limited.

05:01

🚗 Pricing Strategy: Maximizing Sales at Different Quantities

This paragraph elaborates on pricing when selling more units. If only one car is produced, the price could be set at $60,000 for the buyer most willing to pay. However, as more units are produced, subsequent buyers might not value the car as highly, and the price needs to be lowered to attract them. To sell two cars, the price must drop to $50,000. This logic continues as more cars are introduced, illustrating how marginal benefit decreases with each additional unit sold, ultimately affecting the overall price.

Keywords

💡Demand Curve

A demand curve is a graphical representation of the relationship between the price of a good and the quantity demanded. In the video, the demand curve for cars is used to explain how pricing impacts the number of cars sold, with examples such as pricing a car at $60,000 resulting in the sale of one car and lowering the price to $50,000 leading to two sales.

💡Price

Price refers to the amount of money required to purchase a good or service. The video discusses how different prices, like $60,000 or $50,000 for a car, affect the quantity sold, illustrating the inverse relationship between price and demand.

💡Quantity

Quantity refers to the number of units of a good or service that buyers are willing to purchase at a specific price. The video explores how the quantity of cars sold changes when prices vary, emphasizing the shift from price driving quantity to thinking about quantity driving price.

💡Marginal Benefit

Marginal benefit is the additional satisfaction or value gained from consuming one more unit of a good. In the video, this concept is discussed in terms of each additional buyer’s willingness to pay less for additional cars, such as the second buyer being willing to pay $50,000 instead of $60,000.

💡Willingness to Pay

Willingness to pay is the maximum amount a consumer is ready to spend on a good or service. In the context of the video, the first buyer's willingness to pay $60,000 and the second buyer’s willingness to pay $50,000 illustrate how different consumers value the product differently.

💡Market Study

A market study is a method of assessing consumer behavior and preferences to determine pricing and demand. The video references market studies as a way to estimate how much people would be willing to pay for a car when there is limited availability.

💡Consumer Surplus

Consumer surplus is the difference between what consumers are willing to pay for a good and the price they actually pay. The video hints at this concept by explaining that some consumers get more value than what they pay for, such as those willing to pay $60,000 but buying the car for $50,000.

💡Production

Production refers to the process of creating goods or services. In the video, production is connected to the idea of setting prices based on how many cars are produced per week, such as producing only one car to command a high price of $60,000.

💡Opportunity Cost

Opportunity cost is the value of the next best alternative that must be foregone to pursue a certain action. In the video, spending $40,000 on a car is framed as an opportunity cost, as the buyer could have spent that money on something else, like a down payment on a house.

💡Pricing Strategy

Pricing strategy refers to the method businesses use to set prices for their products. The video introduces the idea of changing the perspective on pricing, from determining how many cars are sold at a set price to deciding how much to charge based on how many units the company wants to sell, emphasizing a strategic approach to pricing.

Highlights

The video explores the concept of quantity driving price, rather than the usual approach of price driving quantities.

The example focuses on a demand curve for a new car, analyzing how producers determine prices based on production quantities.

If only one car is produced, the highest bidder is willing to pay $60,000, illustrating how the producer can maximize profit with limited supply.

When two cars are produced, the second customer would only be willing to pay $50,000, showing how the willingness to pay decreases with additional supply.

The video emphasizes the importance of uniform pricing for all buyers, highlighting the trade-offs in maximizing sales at a single price point.

The concept of 'marginal benefit' is introduced, representing the value to the market of producing one additional unit.

The marginal benefit decreases with each additional unit produced, as shown when the price drops to $40,000 to sell the third car.

The video draws a parallel between marginal benefit and opportunity cost, explaining that choosing to buy a car means giving up other potential purchases.

The demand curve can be viewed from the perspective of price being the foregone opportunity, not just the cost of the car.

At any point along the demand curve, the price reflects the marginal benefit for the next consumer or unit produced.

The video transitions to the idea that as more units are sold, the earlier customers get better deals, paying less than their maximum willingness to pay.

If four units are sold at $30,000 each, the first, second, and third buyers gain surplus value since they would have been willing to pay higher prices.

The concept of consumer surplus is introduced, where some customers get more value for their money than what they actually pay.

The next video promises to explore this idea of consumer surplus further, analyzing how different price points affect market dynamics.

The discussion ties into broader economic principles like the Production Possibilities Frontier, where trade-offs and marginal decisions play a central role.

Transcripts

Voiceover: In all of our conversations

about demand curves so far,

I've been generally talking about

price driving quantities.

So for example, we've been saying,

using say this demand curve right here

for a new car in terms of how many

would be sold per day,

we would say things like,

"Well look, if we price it at $60,000 per car,"

this is in thousands of dollars.

"If we price it at $60,000 per car,

"we are going to sell one car.

"If we price it at $50,000 a car,

"we are going to sell two cars."

The way that I've been talking about

it is given a price,

how many are we actually going to sell?

What I want to do in this video

is think about it the other way around.

We're going to look at the exact same demand curve,

the exact same relationship between price and quantity,

but we're going to conceptualize

it in our heads in a slightly different way.

We're going to think about it in terms

of quantity driving price.

To think of it that way,

imagine that we are the producers

of this given model of a new car.

We go the other way.

We don't say, "How many will we sell

"at a price of $60,000?"

Or, "How much will we sell at a price of $50,000?"

We'll go from the point of view

of what if we only produce one car a week?

If we only produced one car a week,

how much could we get for that car?

Let's say somehow you're able to figure that out.

You're able to read people's minds

or you have some type of a market study.

When you ask that question you're like,

"Look if you only allowed one car to be sold each week,

"you determine that in that week there

"is going to be somebody,

"somebody's going to think that it's worth

"$60,000 to buy that car."

That person, they're willingness to pay,

that person is going to be willing to trade $60,000.

They're going to be willing to forego

what else they could have bought

for that $60,000 and instead they want that car.

Then you would plot that point right over there.

If you only had one unit, you could sell it for $60,000.

Now let's go, let's keeping asking ourselves for more units.

Let's say, what if we wanted to sell two units?

Well, if you wanted to sell two units,

you could definitely sell one unit for $60,000,

assuming that you could get that first person,

but that second person,

this might have been the person that

just wants a car so badly it just resonated

with them in some way.

For that second unit,

the second person who is going to need to buy your car,

might not be as excited about it.

That second person will only be willing

to forego $50,000.

That second person would be willing to forego 50.

So if you wanted to sell two units,

if you insist on selling two units,

and if you're assuming you're going

to give the same price for everyone.

We'll talk about in the future

how you might give different prices

to different people.

Assuming you want to give the same price to everyone,

you're going to have to sell your car for $50,000.

Now clearly that first person is definitely

going to jump at it.

They're going to be able to get the car for more

than they were willing to pay.

More than what it was worth to them.

More than the benefit for them,

but if you want two people,

now you're going to have to set this up for $50,000.

Now the same logic.

Now what if we want to sell three cars?

What if we want to sell three cars a week?

Well, if we price it at $50,000,

we'll definitely get those first two,

but the third person might not jump.

The third person isn't going to be as excited

about it or need it as much as these first two.

So you do a market study or you're able to read

people's minds.

You're like, "Look the third person,

"for the market, the marginal benefit."

Let me write this word down.

The marginal benefit.

The marginal benefit for the next unit,

the next unit is going to be $40,000.

To get that next buyer,

and it could be multiple buyers

buying each unit or it could be one buyer

buying all of the units.

Maybe it's some type of a car rental company saying,

"Oh, we don't need to get ... For three

"of these cars I'm not as excited about it anymore.

"My marginal benefit is lower."

This is really the same marginal benefit

that we talked about when we talked about the PPF,

the Production Possibilities Frontier.

In that, we talked about it very explicitly

in terms of trade off,

in terms of opportunity cost.

Here we're measuring the marginal benefit

in terms of price,

but price really can be viewed as a foregone opportunity.

If you spend $40,000 on this car,

you're making the decision not to spend $40,000

on something else.

A down payment on a house or a nice boat,

or whatever else it might be.

So really what we're doing,

is at any point in this curve,

this really is the marginal benefit

for that next buyer.

That marginal benefit to the market

of that next unit of whatever you are producing.

This is a very different way of viewing

the exact same demand curve.

Before we said, "Okay, if we want to price

"it at $50,000, how many are we going to sell?"

Now we're saying, "If we want to sell only two units,

"where can we price it?"

We can price it at $50,000.

If we want to go from two to three units,

we're going to have to price it

at the marginal benefit of that third unit

to the market and it could be the marginal

benefit to that next consumer.

Convincing that next consumer to say,

"Hey it is worth it to buy this car.

"Let's price it at $40,000."

I'm going to leave you there in this video,

but what I'm going to think about

is depending on where you price it,

let's say that we decide that we want to sell four units every week.

So we say, "Well look, to get that fourth

"person to buy this car, we have to price the car

"at $30,000."

What we're going to talk about in the next

video is if you did that,

if this is where you decide to price it

so that you can sell four units,

these other people got really good deals.

The first unit could have gone for much more.

The second unit could have still also

gone for a good bit,

not as much as the first unit.

The third unit could have gone for a little

bit less than the second unit,

but still more than what you ended up selling things for.

We're going to talk about this idea

right over here that some of these

consumers are getting more for their money

than what they have to pay,

or at least in their own minds they are.