Law of Demand Video Lecture | Business Economics for CA Foundation

in this lesson going to introduce the
law of demand distinguish between a
change in the quantity demanded for a
good and a change in demand for that
good and outline some of the
determinants of demand that can cause
the demand for a good to increase or
decrease this lesson builds on the
concepts introduced in our opening unit
in the economics course in which we
introduce the idea of the market system
as a way for society to allocated scarce
resources between competing wants and
needs we learned in one of our recent
lessons that a market is a place where
buyers and sellers meet to engage in
exchanges of goods services or resources
today we're going to be focusing
specifically on a product market in fact
we're going to be looking at the market
for a particular good that for candy you
learned earlier on that every market
involves buyers and sellers today we're
going to be looking at the perspective
of the buyers those who demand a
particular good the buyers of goods
demand that good we have to define
demand and explain the relationship
between a Goods price and the demand for
that good to introduce the concept of
demand to my own students I recently
gave them a survey asking them how much
of their favorite candy in the world
they would buy at a range of prices in a
week every one of my students responded
to the survey you see here first I asked
them what their favorite candy was and
then I asked them how many units or
pieces of their favorite candy would
they buy at prices ranging from two
dollars and fifty cents to 50 cents
let's look at some of the results of
that survey I ended up having about 68
students complete the survey and you can
see their answers here in the column on
the right you can see their favorite
candies and at the top we see the
different price options from two dollars
and fifty cents down to 50 cents let's
study the results here notice that at a
price of $2.50 my 68 students would buy
a total of 173 units of their favorite
candies in a week as the price falls
from 2.50 to 50 cents we see that the
quantity that might
students would be willing and able to
buy increases up to around 500 pieces of
candy each week between the 68 of them
as you can see here in the blue table
I've put the results into a table what
we actually have here is what's called a
demand schedule the table shows us how
as the price of candy increases the
quantity demanded among my 68 students
Falls that's significant but that's not
the best way to visualize the demand for
candy among my 68 students in a week
let's have a look at another way to
represent the demand for candy what we
have here is actually a demand curve and
economics we love graphs we love models
we'd love to be able to visualize basic
economic concepts in ways that make them
easy to understand and this is a very
easy way to represent the total demand
for candy among my 68 students in a week
at a range of prices from 50 Cent's up
to two dollars and fifty cents notice
the vertical axis is labeled price and
the horizontal axis is labeled quantity
demanded as the price of candy Falls
from two point five to two the quantity
demanded increases and so on as the
price falls to one point five down to
one down is 0.5 or half a dollar per
candy the line going through the dark
blue demand curve is the line of best
fit in a later lesson we might calculate
the equation for that line which would
give us the demand equation but today I
just want to focus on the relationship
that we see here
notice that the relationship between the
price of candy and the quantity of candy
demanded among my students is inverse
that's very important that is something
that is so universally true that we
actually call that the law of demand so
let's go over here and we're gonna take
some notes the law of demand tells us
that assuming nothing else changes a
decrease in the price of a good will
cause the quantity demanded to increase
and vice versa in other words if price
increases quantity demanded decreases
the relationship demonstrated among my
own stew
in their demand for candy demonstrates
this inverse relationship very clearly
at higher prices my students demand
lower quantities of candy at lower
prices they demand higher quantities of
candy let's go back to our definition of
the law of demand and we need to
highlight some very important parts of
this definition when I say all else
equal there's actually a Latin
expression that economists like to use
for this and that is ceteris paribus
ceteris paribus is an assumption in
economics that we always make when
looking at how a change in one variable
will cause a change in another variable
so ceteris paribus is our assumption
here whenever the price of a good
changes the quantity demanded changes
inversely to the price this inverse
relationship is so universally observed
among the different goods and services
that society has to choose from that it
is actually known as the law of demand
because it is inviolable laws are obeyed
in nearly every circumstance imaginable
and we're going to assume going forward
in this class that this law will always
be followed in the market for different
goods at high prices consumers will
demand lower quantities and at low
prices consumers will demand higher
quantities we can plot this relationship
on a standard demand diagram which I'm
going to do now first our graph needs
some labels I'm going to put on the
vertical axis the price the price is
what we call the independent variable in
our demand diagram as the price of a
good changes the quantity demanded is
dependent on the price so the quantity
demanded er QD will be my horizontal
axis label
we don't need values on this graph
because the purpose is not to look
specifically at the demand for candy but
more generally in the relationship
between the price of candy and the
quantity demanded and that relationship
is inverse at higher prices there is a
lower quantity demanded so I could
indicate here see that a high prices
there's less candy demanded and at low
prices there's a greater quantity of the
good demanded the line itself is a
visual representation of the demand for
candy so I'll put it
title at the top of my graph we can see
very easily and clearly that as price
decreases to a decrease in price the
quantity demanded increases why is this
why are people willing to buy more of a
good as the price of that good falls
let's take some notes over here to
explain why there is an inverse
relationship between a Goods price and
its quantity demanded there's a couple
of explanations for the law of demand as
a Goods price Falls consumers feel that
their real income is increasing this is
known as the income effect lower prices
leave us with greater purchasing power
as we have greater purchasing power we
tend to demand more of particular goods
in the case of candy have fallen the
price of candy from two dollars and 50
cents to 50 cents makes my students who
may have fixed allowances or incomes
feel a little bit richer therefore as
they feel richer they think they can buy
more candy the income effect is one
explanation for the law of demand and
other explanation is what we call the
substitution effect as the price of a
particular good Falls potential
substitutes for that good appear more
expensive so we tend to consume less of
the substitutes in other words the goods
that we might have consumed besides the
good in question and more of the good
whose price is falling an example of
this might be other treats that students
might buy besides candy so if the price
of candy Falls students may substitute
candy instead of other goods like
cookies or ice cream and other treats
that they might have enjoyed instead of
candy as the price of one good Falls
people tend to substitute more of that
good into their consumption because the
other goods they might have consumed
appear more expensive this explanation
for the law of demand is known as the
substitution effect a third explanation
that economists like to use when
explaining the relationship between a
Goods price and the quantity demanded is
the idea that as individuals consume
more of a good they enjoy additional
units of that good less and less this is
what we call
diminishing marginal utility because we
get less utility or happiness out of
additional units of good as we consume
more of it we are willing to pay less
and less for it so we can say there are
four consumers are only willing to buy
more of a good if its price Falls we can
see that relationship quite clearly in
our demand for candy here at higher
prices consumers are willing to buy less
of a good because they get a lot of
marginal utility out of the first few
pieces of candy personally my favorite
candy is butterfingers if butterfingers
were selling for two dollars and 50
cents apiece I'd probably only buy one
per week because I truly value that
first Butterfinger at more than two
dollars and fifty cents but a second
Butterfinger I will not value at two
dollars and fifty cents therefore I
would not be willing to buy more than
one Butterfinger unless they were
selling for less than two dollars fifty
cents however at a price of 50 Cent's I
would probably buy four or five
butterfingers in a week because the
additional benefit or utility I get from
the third fourth or fifth Butterfinger
is less than the original two dollars
and 50 Cent's I was being asked to pay
however at a price of 50 Cent's I
certainly get more than 50 cents of
benefit out of a fourth Butterfinger
diminishing marginal utility helps
explain why consumers will buy more of a
good as the price falls it's because we
get less benefit out of additional units
of a good therefore we're only willing
to buy more if it as the price decreases
these three economic concepts the income
effect the substitution effect and
diminishing marginal utility help
explain the inverse relationship between
a Goods price and the quantity that
consumers are willing and able to buy in
a particular period of time this
relationship is encapsulated in both the
demand schedule or table which we saw
here and the results from my survey
among my students and a demand curve
which we see here which plots that
relationship between a Goods price and
quantity demanded demand can always be
illustrated as a curve like we see in
this graph on the right as the price of
the good is high the quantity consumers
are willing and able to buy as low as
the price of the good is low the
quantity consumers are willing and able
to buy increases in our next lesson
we're going to distinguish between a
change in the quantity demanded for a
good
and a change in the goods demand it will
also outline some of the determinants of
demand that can cause an entire demand
curve to shift inwards or outwards here
we go one step back