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Supply and Demand

The Basics of Demand


The Basics of Demand

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Alright so now that we've defined our perfectly competitive market, let's check out demand in that market. So first off I wanna introduce you to our price quantity graph. This is where we're gonna be doing most of our analysis throughout this chapter is going to be on a graph like this. And I just wanted to make a point here of how we set up the graph. We're gonna have a price on the y. Axis, the up and down axis and quantity on the left and right access here. The easy way to remember this is is I think of it as just alphabetical order, right? We're going left to right. We've got P. Q. Cool. And on the graph eventually we're gonna be drawing lines that kind of look something like this and our analysis is going to follow some sort of that kind of steps there. But for now I just wanted to iterate this about the P. And the Q. And the alphabetical order. So you remember just how to set up the graph. So let's talk about demand and a little bit here. So what is demand, demand relates to the behavior of the buyers um In our market we also call them consumers. So I want to put that both of that in here. We've got buyers um and consumers. So this is the behavior of the buyers in the market. Um So let's just define some terms related to demand, the first one here being quantity demanded and that's the amount of a good that buyers are willing to purchase at a price. Right? So you have to imagine if the price was $10 and the consumers want 100,000 units then the quantity demanded at $10 is 100,000. Right? So we're gonna use this notation when we talk about quantity demand, we're gonna do a big Q. With a little subscript D. They're like you see cool quantity demanded throughout this chapter will use that notation for quantity demanded. And the demand schedule is pretty easy. It's just list pairs of prices and quantity demanded. So it's gonna tell us at different prices how much quantity is demanded at those prices. So here we go. The law of demand do when the price of a good rises, the quantity demanded of that good falls. So this is pretty logical right? When the prices go up we're gonna buy less of that good. So the idea here, I'll write it here price up. And this is kind of notation that we're gonna be using quantity demanded down. This is just a simple way to kinda simplify this this whole sentence, right? Price up then quantity demanded down and the opposite works too. And you'll see a lot of the time and we're only gonna talk about one direction like what happens if this goes up the opposite also um is true, right? We've got the vice versa thing happening here. So if the price goes down then we are going to see that the quantity demanded goes up. So how do we explain this law of demand? What makes this happen? Well, there's two factors um that affected, so this is what we call the substitution effect is the idea that when the price goes up, people are gonna buy other things instead, I'm gonna put by other things. Right? So the idea is, yeah, there's a higher price. Well, I'm just gonna spend my money on something else. Um The other reason this law of demand is an action is that when the price goes up we can just afford less of it. Right? This is the income effect. If it's a higher price, it's just gonna take up more of our budget and we just can't afford as many units as we could have previously. So we can afford less of the product when the price goes up. So for these two reasons, we see that the law of demand, um the law demands holds true, right? So when the price goes up, people buy other things and they can also just afford less of the product. So the quantity demanded is gonna fall. All right, So let's go down here to our demand curve and our final discussion for the page here. So the demand curve is a graph that's gonna show the relationship between the prices of a good and the quantity demanded at those prices. Um And I just want to reiterate real quick that the demand curve, this is demand and you might be thinking, well, obviously you just told me that it's the demand curve but um there is a big distinction throughout this chapter between demand and quantity demanded. Remember demand is gonna be the whole curve of all the different possibilities of prices and quantity demanded. Where quantity demanded is gonna be a specific point at a specific price. Cool. Alright. So when we when we talk about demand, we're gonna just notated as just a big deal like that. So quantity demanded was the cue with the little D. And here we're just gonna have a D. For demand. All right, so let's go ahead and go onto the graph here, we've got a demand schedule for wheat on the right and then I've got those points plotted on the graph and let's notice something's just from our demand schedule real quick. So you'll see at a price of $9. People want 10,000. And as the price lowers, you're gonna see the quantity going up. This goes hand in hand with the law of demand, right? As the price falls, quantity demanded goes up. So um what I have here on the graph, I've taken those points and plotted them and to make a demand curve. What we're just going to connect these points for now, I'm gonna use blue for demand and once we get to supply I'll use red for supply. Um But actually once we put them together we're gonna have a really cool color system. Uh So for now it's not as important when there's just one on the graph. Um And one thing I want to know about demand just so you don't forget because demand notice it has this downward slope here, right? It goes down as the as the price falls, the quantity demanded is going up. Right? So over here we've got this is our price axis, quantity axis just like before. Um And a good way to remember that demand is falling. Look, I'm a guy, this is just the way I remember it, I think the double Ds. So we've got the demand and we've got the downward slope here. Alright, so don't take it too personally. That's just the way I think of it. Hopefully it'll help you to, we've got demand is the double Ds. And supply. We'll supply is just the other one. As long as you remember the demand is downward, it'll be easier to remember that supply is going to be going upward, but just remember double Ds demand downward. One last point I wanna make here, I'm gonna get out of the way real quick. You'll see this note some goods are exceptions to the law of demand, but that's beyond the scope of this class. There are some goods that behave in really weird ways, but we're not gonna talk about those here. Um we've got like, you know, 99% of the goods are gonna be covered through the law of demand, so don't worry about those. Um, You could do a little research on your own if you want, if you're really curious, but I'd say it's not worth it. Cool, So that is our introduction to demand. Why don't we go ahead and move on now?