The Demand Curve

Transcript:

In the demand curve,
we are trying to find out what’s the relationship
between price and the quantity that is demanded.
Let’s make it really simple by keeping everything else constant.
That means ceteris paribus,
given everything else constant.
Let’s freeze them!

Wow, only price and quantity left.
With these 2 variables, we can draw 2 axes.
The convention
is to put the price on the vertical axis
and quantity on the horizontal axis.

Remember, as consumers,
we want to stretch our dollar.
At $2, eww, apples are expensive,
we’ll only get 1 apple. (pause)
But at $1, woah, apples are cheaper now,
we’ll get 3 apples.
Then we connect the dots.
Tada, the demand curve!
Note-- it’s downward sloping.
When price increases, quantity demanded decreases.
When price decreases, quantity increases.
The arrows are always in opposite directions.
This is the law of demand:
there’s an inverse relationship
between price and quantity demanded,
ceteris paribus,
given everything else constant.

Why? First,
it’s because of substitution effect.
When apples get more expensive,
we substitute apples with something else, like oranges.
So we buy fewer apples.
There’s also the income effect.
Given the same income,
when apples get more expensive,
our purchasing power erodes.
We feel our wallets shrinking.

Remember the summary from the previous video?
Why did I state quantity demanded here and demand here?
What’s the difference?
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Next up: Change in quantity demanded vs change in demand

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Why is the demand curve downward sloping? Because there's an inverse relationship between price and quantity demanded.

Why is there an inverse relationship between price and quantity demanded? Why does price and quantity demanded change in opposite directions? Why price increases, why does quantity demanded decrease? Well, it's because of the substitution effect and income effect. When the price of apple increases, for example, we tend to substitute apples with some other similar goods like oranges.

In addition, when price increases, our purchasing power drops. With the same amount of money, we can now buy fewer goods. So our real income decreases and we purchase fewer goods. This is called the income effect.

The law of demand states that there is an inverse relationship between price and quantity demanded. The higher the price, the fewer the number of people willing and able to buy a good. Hence, the demand curve slopes downwards. The gradient of the curve is negative.