Source: All Images of Graphs and tables created by Kate Eskra
Hi, welcome to Economics. This is Kate. The title of this tutorial is Demand. As always, my key terms are in red, and my examples are in green.
So in this tutorial, you'll be learning the law of demand. I'll be giving you a demand schedule, and we'll be drawing a demand graph from that demand schedule.
We'll be talking about why it is that a demand curve is downward sloping. And you'll understand a couple of examples that I give you where there might be some exceptions to that rule. And then finally, we'll talk about why ceteris paribus is important when we're talking about demand.
OK, so let's talk about demand in your life. Whether or not you realize it, you probably use the law of demand almost every day. Have you ever bought something just because it was on sale? I know I have.
Have you used a coupon or brought in an advertisement to get a deal on something lately? Or have you decided not to purchase something because its price was just too high at the moment? If you answered yes to any of those three examples, you've used demand in your life.
OK, so what is demand? Demand is I want something. I'm demanding it. But it also means that you have the ability to afford it. We can't say that we demand something if it's completely outside of our realm of possibilities with our income. So sometimes, people refer to demand as willingness to pay.
All right, so here's an example for you. I happen to be an apple lover. I eat an apple for lunch almost every day. And it just so happens that because I like to put peanut butter on them, I like the really tart ones. I love Granny Smith apples.
All right, so here is my hypothetical. This is a demand schedule that I made up for myself for Granny Smith apples. So if each Granny Smith apple were $2, I'm saying, that's where I draw the line. I'm not going to buy any.
But they go down to $1.50, maybe I'll buy one a week. That's still pretty pricey. You'll notice that as the price drops, I buy more.
So what we do from that demand schedule is we make a demand graph. The first step in looking at a graph is to look at what we're labeling the axes. This y-axis here is always going to be the price of whatever good we're talking about. So in this case, it's the price per apple. And you'll notice that my prices correspond with my prices over here.
The x-axis is always quantity. So this is the quantity of Granny Smith apples per week. And that corresponds with this column right here.
So if we start up here, I just charted these numbers. When Granny Smith apples were $2, I purchased none of them. So that's that point. As the price lowered, the quantity that I'm purchasing begins to increase. So this dot right here represents at $1, I purchase three. And that's exactly what that is showing.
OK, so notice that as the price of Granny Smith apples drops, I buy more. And when I say I buy more, I want your terminology to be, as the price falls, the quantity that I'm demanding increases, OK? That's just kind of important terminology to know for economics, that we say, as price falls, quantity demanded increases. And vice versa would also be the case. As price rises, quantity demanded would fall.
So why is it that the demand curve is downward sloping? Hopefully, this makes sense to you that as price falls, we buy more. But why is that?
So for example, let's say I'm right here. And they're $1 each, and I've already purchased three Granny Smith apples for the week. You know what? I've three apples this week. Do I need a fourth? Well, now that I've already had three, in order to give me an incentive to buy a fourth, they're going to have to lower price, right?
And now that I've had a fourth, you know what? I'm only going to purchase another one and eat five apples this week if the price is a little bit lower, at $0.50. And so again, as we are purchasing more and more and more, they're going to have to lower the price in order for us to purchase even more, OK?
All right, so here it is-- the law of demand. And this is a big key term for you. It's the inverse correlation between price and quantity with all other variables fixed. So what do we mean by this phrase? That's what we want to get into next.
That's what ceteris paribus is. Ceteris paribus means that we're holding all other variables constant when we're looking at this. So as the price of Granny Smith apples was going up, we would expect that people, like me, would be buying fewer Granny Smith apples. Ceteris paribus is saying that only the price of Franny Smith apples has changed, OK?
So the reason I'm buying fewer Granny Smith apples is because the price has changed. The price of Gala apples didn't change. The price of oranges or bananas did not change. And our income didn't change. So nothing else except for the price of Granny Smith apples changed.
Ceteris paribus says let's eliminate all these other variables and just look at one thing at a time. And in this case, that one thing is the price of the good.
All right, so are there exceptions to maybe the rule? So can you think of anything where if the price of it went up, you might actually buy more? I can't really think of anything for me personally, but maybe for stature or prestige? It has been noted that this can happen once in a while on things like designer purses or really, really high-end wine, or even extremely luxury cars.
When these things go up in price, sometimes people actually purchase them because they're more expensive, just to show how wealthy they are. Again, I'm hoping that I would never fall into this trap. But apparently, some people do.
There's also some other exceptions to the rule of a downward sloping demand curve. Sometimes, there are products that regardless of price, people have to purchase. And that's something we call a perfectly inelastic demand.
An example of that would be a life-saving medicine that someone absolutely needs every day. So this would be a month's supply of a life-saving medicine, and I am showing here that regardless of how expensive it is-- whether it's 500, 400, 300, or so on-- 30 pills are purchased in a month by this person. Because no matter the price, they have to have this pill every day in order to live, OK? So that would be one exception.
The opposite end of that extreme is-- this is a little bit more hypothetical. But sometimes, a producer can really only sell for one price. At this price, they can sell all that they want. So there's no reason for them to lower the price. If they raise the price, even hypothetically by a cent or $1, or whatever small portion, nobody at all would purchase it from them.
And the closest example that we can come up with with these perfectly elastic goods are agricultural products, because they're the same regardless of who is selling it. So someone who would be purchasing a bushel of wheat is going to only go to the person who is selling it for the lowest amount. So if the going rate is $25 for a bushel of wheat and you're a farmer, you can only sell for $25. That would be another exception to downward sloping demand.
OK, so what did you learn this tutorial about demand? You learned that the law of demand describes the relationship between price and quantity, that there's an inverse relationship between them. So as the price falls, the quantity demanded rises. As price rises, the quantity demanded falls, except in these few rare situations that I talked about at the end of the tutorial.
And finally, we talked about a phrase called ceteris paribus, which means that we hold everything else constant. We're only isolating a price. Thank you so much for listening. Have a great day.
Law of Demand
The inverse correlation between price and quantity with all other variables fixed.
Holding all other variables constant.