- [Instructor] In other
videos, we have already talked
about the law of demand, which tells us,
and this is probably already
somewhat intuitive for you,
that if a certain good is
currently at a higher price,
that the quantity demanded
will be quite low,
and then as the price were to decrease,
the quantity demanded would increase.
So, if you were to graph demand,
and so this right over
here is our demand curve,
where price is on our vertical axis
and quantity is on our horizontal axis,
which is the standard
convention for most economists,
you would have a downward
sloping demand curve.
What we're going to do in this video
is dig a little bit deeper into why
we have that downward
sloping demand curve.
And I know what some
of you all are saying,
well, it kind of makes common sense.
As the price goes down,
I would want more of that
and so so would everyone else.
But let's dig into why you
would want more of something
as the price goes down.
So one category of
reasons why you might want
more of it as the price goes down,
economists will call
the substitution effect.
Substitution,
substitution effect.
And this is the idea that if we're
looking at the price verses
quantity, say, of candy,
and let's say at first the
price is right over here
at $4 and at $4 the quantity demanded
in the market would be,
let's say that is 100 units
of the candy, maybe it's
100 pounds of the candy.
That if the price were to
then go to $2 for some reason,
so, let's say the price is at $2,
well, then a lot of folks could say,
gee, that candy is looking a lot better
relative to other things that
I might buy with my money.
So, for example, people might be picking
between candy and fruit
and maybe, at first,
they were both $4 a pound,
but now all of a sudden
if the candy is $2 a
pound, or $2 per unit,
well, then it's looking a lot
better relative to the fruit.
So, some of that quantity of fruit
people would have bought, they'll say,
hey, now candy is a better deal,
I'm going to substitute
the fruit with candy.
And so that's why you
have a higher quantity
of candy demanded, this might maybe
be now 250 units.
Another major category
why you would expect this
downward sloping demand
curve for normal goods,
and we'll talk about
things like inferior goods
in future videos, is the income effect.
Income effect, and in some ways
this might be the most intuitive.
Well, if the price went from $4 to $2,
well the cost of those hundred units
would not be 1/2 as much,
it would go from $400
to $200, and so the market
would have an extra $200
to use to buy things with
and some of that extra $200,
they'll buy more candy with it,
and they might also buy
other things with that.
Now, the last dimension that economists
will often talk about
for why the law of demand
is downward sloping like this,
and we talk about this in other videos,
is this idea of decreasing, decreasing
marginal utility, and that's that idea
that that first, if you're just
that first amount of candy,
there's gonna be people in the market
who take a lot of value from it.
They are just addicted to candy.
Their bodies are dependent on that candy,
but as soon as those folks are satiated,
that next incremental amount,
that next marginal amount,
the utility might be a little bit lower
and so, as you have more and more candy,
the marginal utility goes down,
and so that's another
way of thinking about
why we have a downward
sloping demand curve.
