Y1 3) Demand and the Demand Curve
Summary
TLDRThis 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
- π Demand is the quantity of a good or service consumers are willing and able to buy at a given price and time period.
- βοΈ 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.
- π A demand curve is downward sloping, showing the inverse relationship between price and quantity demanded.
- π 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.
- π The assumption of ceteris paribus (all other factors remain equal) allows for isolating the effect of price changes on demand.
- πΈ The income effect explains that as prices rise, purchasing power decreases, leading to lower demand.
- π The substitution effect suggests that as prices increase, consumers may switch to cheaper alternatives, reducing demand for the original product.
- π 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.
- π 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.
- π 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
π 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.
π 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.
π 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.
π 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.
π₯ 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.
π° 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.
π 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.
π¨οΈ 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.
π 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.
Mindmap
Keywords
π‘Demand
π‘Law of Demand
π‘Demand Curve
π‘Ceteris Paribus
π‘Contraction of Demand
π‘Extension of Demand
π‘Income Effect
π‘Substitution Effect
π‘Shift in Demand Curve
π‘Non-Price Factors
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
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