Law of Demand

Example of the law of demand

In this video we're gonna talk about the law of demand

which is one of the core ideas of micro-economics.

And luckily for us, it is a fairly intuitive idea.

It just tells us that if we raise the price of a product,

that will lower the quantity demanded for the product.

The quantity demanded will go down,

and you can imagine the other side of that.

If we lower the price of a product,

that will raise the quantity demanded of that product.

And the law of demand says, just kind of generally

what we'll see in a few videos from now,

that there are some exceptions to this.

But to make this a little concrete,

let's think about the demand for a certain product.

And one thing I'm gonna clear here,

and I want to take great pains to not mess this up,

is that when we talk about the word DEMAND,

in a formal economic sense,

we're not talking about a quantity,

we're actually gonna talk "all else equal",

"ceterus perebus"

all the relationship between price and quantity demanded.

If we talk about an actual quantity,

we should say the quantity demanded.

So DEMAND vs QUANTITY DEMANDED,

these are two different things.

If it‘s a little confusing to you right now,

hopefully by the end of this video

the difference between demand and quantity demanded

will become a little bit clearer,

and definitely over the next few videos.

Because in this video we're gonna focus on,

how the quantity demanded changes relative to price.

In future videos we'll talk about how the entire relationship,

how demand changes based on different factors.

But to make things concrete,

let's say I'm about to release my science fiction book,

space whatever..I don't know...the book I want to release..

So I'm gonna release some e-book,

And we've done some market study

or we just know how the price is

or how the demand is related to price,

or price is related to demand.

And we're gonna show that in a DEMAND SCHEDULE,

which is really just a table

that just shows

how the price... and actually I made my first mistake.

I just said how price relates to demand.

I should say how price relates to quantity demanded,

and how quantity demanded relates to price.

So a demand schedule, it shows

a relationship between price and quantity demanded.

ALL ELSE EQUAL.

So we're gonna have multiple scenarios here.

So this column is for scenarios.

This column let me put my price.

This column I put my quantity demanded.

So a scenario...

Let's call this a scenario A.

I could price my book at $2.

And I'll get a ton of people downloading it at that price.

So I will get 60,000 people

download my book at that price my e-book.

Scenario B, I could raise the price by $2.

So it's now at $4 and then that kills off a lot of the demand.

Now the quantity demanded goes down to

40,000 people downloading it.

Then I go to scenario C.

If I raise by another $2,

so now I'm at $6,

that lowers the quantity demanded to 30,000.

I will do a couple more of these.

Scenario D, I raise another $2.

So I get to $8 now.

Now the quantity demanded goes down to 25,000.

And I'll do one more of these

-See what color I haven't used yet-

-I haven't used yellow yet-

Scenario E, I raise it to $10.

Now the quantity demanded let's just say it is 23,000.

So this relationship,

this shows the law of demand right over here.

And this table that shows,

how the quantity demanded relates to price and vice versa.

This is what we call the DEMAND SCHEDULE.

Now we can also, based on this demand schedule,

draw a DEMAND CURVE.

We're really just gonna plot these points and

draw the curve that connects them

because these aren't the only scenarios.

Anything between them is also possible.

We could charge $2.01 for the book.

We could charge $4.50 for the book.

And so that‘s what the demand curve captures a little bit better,

because it’s a continuous curve and not just 5 points.

So let's do that.

Let’s graph it.

And this is one of those conventions of economics

that I am not a fan of,

because people often talk about changing the price

and how the quantity demanded changes from that.

And in traditional...in most of math and science,

the thing that you're changing

you normally put on the horizontal axis.

So if I was in charge of the convention of economics

I would plot price on the horizontal axis right over here.

But the way it's done typically

is that price is done on the vertical axis.

So you're used to seeing it

in kind of the traditional class environment.

I'll do the same.

So we'll put price in the vertical axis

and we'll put quantity demanded in the horizontal axis.

And now the quantity demanded goes all the way up to 60,000.

So that's a 10..20..30..40..50..60

So it's 10 ... this is in thousands

20...30...sorry not 45...40...50 and 60

and this is in thousands.

And the price goes up to $10

from $2 to $10.

Let's say this is 2..4..6..8 and 10.

So let's plot the scenarios.

So Scenario A, price is $2

60,000 units are demanded.

That is Scenario A, right over there.

Scenario B, when the price is $4,

40,000 units are demanded.

$4, 40,000 units that's right over there.

That's Scenario B.

Scenario C, $6, 30,000 units.

Scenario D, $8, 25,000 units.

$8, 25 is right about there.

That looks like 25,000 right in between. That's close enough.

So that right over there is Scenario D.

And then finally Scenario E,

$10, 23,000 units.

So that would be something like that.

That is Scenario E.

And so we can actually have prices anywhere between them

and maybe we can go even further.

So this right over here.

So if I were to draw the demand curve,

it could look something like this.

A demand curve would look something,

-I'm trying to do my best to draw a straight continuous line-

could look something like that.

It could keep going on and on.

And so these are two ways to show demand.

So I'm just going back to what I said earlier.

The quantity demanded is, all else equal, for a given price,

how many units people are willing to download

or buy of my e-book.

When we talk about the demand itself,

we're talking about this entire relationship.

So this demand itself,

is this entire demand schedule.

Or another way to think of it is,

is this entire demand curve.

If demand were to change,

we would actually have a different curve.

This curve would shift

or the entries in this table would shift.

If the quantity of demand changes,

we move along this curve.

When you hold everything else equal

and you only change price.

So hopefully that makes that clear.

When everything else is equal

and you're only changing price,

you're not changing demand.

You're changing the quantity demanded.

The demand, because everything else is equal,

is this relationship.

In the next few videos,

we'll think about what does happen,

when you do change some of those other factors.