The Market Forces of Supply and Demand
The Demand Curve
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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?
The market demand is the sum of all of our individual demands.
Individual Demand and Market Demand
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Alright, so now let's see how your individual demand curve will relate to the market demand curve. So every person has their own individual demand curve, right? This is how much they would want at a certain price? If we're talking about cereal and the price is $5. How much boxes, how many boxes of cereals would you buy at $5 or at $4? This is your personal demand curve, but to find the market demand curve, what we do is we're gonna some all the individual demand curves, right? So we're gonna get the sum of all the individual demand curves to find the market demand. So if at $10 I want this many, you want that many, Someone else wants that many. The market demand is going to be the sum of all our individual demands. Let's look at this example here. So I've got the market for Supreme pizzas here. And to keep it simple, we're going to say that there's only these two guys in the market, We've got Fat Albert and skinny Hendricks here and we want to find out what the market demand is at all these different prices. So we've got their individual demands here and to find the market demand. We're just going to add them up. Pretty simple. So at a price of $2 Fat Albert's gonna want 16 pizzas, uh skinny Hendricks wants four pizzas, we're gonna add those up. We're gonna get a market demand of 20 pizzas at a price of $2. Cool, so let's just go ahead and do all of these here. So at a price of $4 what do we get? We get 12 plus three. Uh market demand of 15 at a price of six. We'll get a market demand of 10. Right? And this is consistent with our law of demand as well, right? We're seeing that as the price rises, The quantity demanded here is falling both for the individuals and for the market. Cool. So we're consistent here. Let's go ahead and put these numbers on the graph. So first we've got graphs for Fat Albert and skinny Hendricks here. Right? So notice everyone has their own individual demand curve. I'm gonna scroll down a little more. So we got Fat Albert in that first column. Cool. Alright, so the first thing we wanna do is label our axis here. So let's start with Fat Albert here. And remember we gotta label one price and one quantity. And my trick you remember is we're gonna put them in abc order left to right price quantity there. Cool. Alright, let's go ahead and graph Fat Albert's demand here. So at a price of two, he's gonna want 16, price of four. Let's just get all of these on here. He wants 12. 6. He wants eight. Um And if you guys are struggling here with the graph, make sure you watch the graphing review from segment one, and you will probably do a lot better here on the graphs. Cool. So that is gonna be Fat Albert's demand. This is just Fat Albert's individual demand curve here. Right? Fat Albert, I guess I have that written at the top, but I just want to reiterate that Fat Albert's demand is this curve right here? Cool. And let's say the price was $6. Well, Fat Albert's quantity demanded would be eight. Cool, understand. Let's do the same thing for skinny Hendricks here. So, he's gonna have a different demand curve. Um Let's start again with the price of $2. He's gonna want four. Right? So, we're back up here on in our table. We've got a price of $2 skinny Hendrix's demand is four. Cool. So, I'm gonna scroll down. So we have the whole graph and I'm gonna get out of the way while we make this one. All right, let's do this same thing. I want to label the axes again. We've got price. We've got quantity. Alright, let's go ahead and get their points. The skinny Hendrix's points on the graph. So we've got a price of two. He's gonna want four at a price of four. He wants three and that's gonna be right here in the middle of two and four. There we go. At a price of six. He's gonna want to let's get all these in here. 81 and 10 0. Cool. So let's go ahead and make his demand curve. And we've got a line looking something like that. All right. And that one is going to be skinny Hendrix's demand and notice that they look different, right? Because everyone's demand curve is gonna be a little different. So there's his demand, right? There, just the same. His quantity demanded at a price of six. His quantity demanded would be two pizzas. So to make our market demand, what we're gonna do is we're gonna sum these graphs and I'm gonna go ahead and do plus and over here equals and we're gonna go down to our market demand curve. And here we're gonna put in our points from the market demand above. So this is the sum of fat Albert and skinny Hendricks here, I got space. I'm coming back in. All right, let's do this. So, we've got at a price of 10 on our on our table there. We we calculated that market demand was gonna be 20. Excuse me. Um at a price of $2. So let's first label our axis price and quantity always want to do that first. Okay, here we go. Price of two quantity demanded 20 price of four, quantity demanded 15, price of six, quantity demanded 10, price of eight quantity demanded five and price of 10. Nobody wants pizza. Cool. Well there you go. This is gonna be our market demand curve here and this is the sum of everybody in the market, which in this case was just these two people. So we've got market demand and you can imagine if there was thousands of people in the market, we would be doing this thousands of times. But this is just the idea of what's happening. So here a little summary when you're asked to find the market demand, you just got to some the individual demand curves at the different prices and different quantities. Cool, Alright, let's move on.