Microeconomics Khan Academy

8/17/2019 Microeconomics Khan Academy

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Law of demand

Key points

The law of demand states that a higher price leads to a lower quantity demanded and that a

lower price leads to a higher quantity demanded.

Demand curves and demand schedules are tools used to summarize the relationship

between demand and price.

Demand for goods and services

Economists use the term demand to refer to the amount of some good or service consumers are

willing and able to purchase at each price. Demand is based on needs and wants—a consumer may

be able to dierentiate between a need and a want, but from an economists perspective they are the

same thing. Demand is also based on ability to pay. !f you cannot pay, you have no eective demand.

"hat a buyer pays for a unit of the speci#c good or service is called price. The total number of units

purchased at that price is called the quantity demanded. $ rise in price of a good or service almost

always decreases the quantity demanded of that good or service. %onversely, a fall in price willincrease the quantity demanded. "hen the price of a gallon of gasoline goes up, for e&ample, people

loo' for ways to reduce their consumption by combining several errands, commuting by carpool or

mass transit, or ta'ing wee'end or vacation trips closer to home. Economists call this inverse

relationship between price and quantity demanded the law of demand. The law of demand assumes

that all other variables that aect demand are held constant.

Demand schedule and demand curve

$ demand schedule is a table that shows the quantity demanded at each price.

$ demand curve is a graph that shows the quantity demanded at each price.

(ere)s an e&ample of a demand schedule from the mar'et for gasoline.

Price (per gallon) Quantity demanded (millions of gallons)

*+.--+.--dollar sign, , point, -- ------

*+./-+./-dollar sign, , point, /- 0--0--0--

*+.1-+.1-dollar sign, , point, 1- 2--2--2--

*+.2-+.2-dollar sign, , point, 2- 33-33-33-

*+.-+.-dollar sign, , point, - 3--3--3--

*+/.--+/.--dollar sign, /, point, -- 12-12-12-

*+/./-+/./-dollar sign, /, point, /- 1/-1/-1/-

4rice, in this case, is measured in dollars per gallon of gasoline. The quantity demanded is measured

in millions of gallons over some time period—for e&ample, per day or per year—and over some

geographic area—li'e a state or a country.

(ere)s the same information shown as a demand curve with quantity on the horizontal a&is and the

price per gallon on the vertical a&is. 5ote that this is an e&ception to the normal rule in mathematics


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that the independent variable 6& x &7 goes on the horizontal a&is and the dependent variable 6y y y7goes on the vertical.

A Demand Curve for asoline

The graph shows a downward8sloping demand curve that represents the law of demand.

The demand schedule shows that as price rises, quantity demanded decreases, and vice versa. These

points are then graphed, and the line connecting them is the demand curve. The downward slope of

the demand curve again illustrates the law of demand—the inverse relationship between prices and

quantity demanded.

Demand curves will be somewhat dierent for each product. They may appear relatively steep or 9at,

and they may be straight or curved. 5early all demand curves share the fundamental similarity that

they slope down from left to right, embodying the law of demand: $s the price increases, the quantity

demanded decreases, and, conversely, as the price decreases, the quantity demanded increases.

Attribution

!he di"erence #etween demand and quantity demanded

!n economic terminology, demand is not the same as quantity demanded. "hen economists tal'

about demand, they mean the relationship between a range of prices and the quantities demanded at

those prices, as illustrated by a demand curve or a demand schedule. "hen economists tal' about

quantity demanded, they mean only a certain point on the demand curve or one quantity on the

demand schedule. !n short, demand refers to the curve, and quantity demanded refers to a speci#c

point on the curve.

$hat factors change demand%

Key points

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Demand curves can shift& %hanges in factors li'e average income and preferences can

cause an entire demand curve to shift right or left. This causes a higher or lower quantity to be

demanded at a given price.

Ceteris pari#us assumption& Demand curves relate the prices and quantities demanded

assuming no other factors change. This is called the ceteris paribus assumption. This article tal's

about what happens when other factors aren)t held constant.

$hat factors a"ect demand%

"e de#ned demand as the amount of some product a consumer is willing and able to purchase at

each price. That suggests at least two factors in addition to price that aect demand. "illingness to

purchase suggests a desire, based on what economists call tastes and preferences. !f you neither

need nor want something, you will not buy it. $bility to purchase suggests that income is important.

4rofessors are usually able to aord better housing and transportation than students because they

have more income. 4rices of related goods can aect demand also. !f you need a new car, the price of

a (onda may aect your demand for a ;ord. ;inally, the size or composition of the population can

aect demand. The more children a family has, the greater their demand for clothing. The more

driving8age children a family has, the greater their demand for car insurance, and the less for diapers

and baby formula.

!he ceteris pari#us assumption

$ demand curve or a supply curve is a relationship between two, and only two, variables: quantity on

the horizontal a&is and price on the vertical a&is. The assumption behind a demand curve or a supply

curve is that no relevant economic factors, other than the product’s price, are changing . Economists

call this assumption ceteris paribus, a . !f all else is

not held equal, then the laws of supply and demand will not necessarily hold. The rest of this article

e&plores what happens when other factors aren)t held constant.

'ow does income a"ect demand%

?ay we have an initial demand curve for a certain 'ind of car. 5ow imagine that the economy e&pands

in a way that raises the incomes of many people, ma'ing cars more aordable. This will cause the

demand curve to shift.

hifts in demand a car e*ample


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The graph shows demand curve D sub - as the original demand curve. Demand curve D sub represents a shift based on increased income. Demand curve D sub / represents a shift based on

decreased income.

$s a result of the higher income levels, the demand curve shifts to the right, toward *te&t D@DD,start subscript, , end subscript. 4eople have more money on average, so they are more likely to

buy a car at a given price, increasing the quantity demanded.

$ decrease in incomes would have the opposite eect, causing the demand curve to shift to the left,

toward *te&t D@/D/D, start subscript, /, end subscript. 4eople have less money on average, so theyare less likely to buy a car at a given price, decreasing the quantity demanded.

What about shifting up and down?

"hen a demand curve shifts, it does not mean that the quantity demanded by every individual buyer

changes by the same amount. !n this e&ample, not everyone would have higher or lower income and

not everyone would buy or not buy an additional car. !nstead, a shift in a demand curve captures an

pattern for the mar'et as a whole.

+ormal and inferior goods

$ product whose demand rises when income rises, and vice versa, is called a normal good. $ few

e&ceptions to this pattern do e&ist, though. $s incomes rise, many people will buy fewer generic8

brand groceries and more name8brand groceries. They are less li'ely to buy used cars and more li'ely

to buy new cars. They will be less li'ely to rent an apartment and more li'ely to own a home, and so

on. $ product whose demand falls when income rises, and vice versa, is called an inferior good. !n

other words, when income increases, the demand curve shifts to the left.

,ther factors that shift demand curves

!ncome is not the only factor that causes a shift in demand. Ather things that change demand include

tastes and preferences, the composition or size of the population, the prices of related goods, and

even e&pectations. $ change in any one of the underlying factors that determine what quantity

people are willing to buy at a given price will cause a shift in demand. Braphically, the new demand

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curve lies either to the right, an increase, or to the left, a decrease, of the original demand curve.


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umming up factors that change demand

?i& factors that can shift demand curves are summarized in the graph below. 5otice that a change in

the price of the good or service itself is not listed among the factors that can shift a demand curve. $

change in the price of a good or service causes a movement along a speci#c demand curve, and it

typically leads to some change in the quantity demanded, but it does not shift the demand curve.

.actors !hat hift Demand Curves

The graph on the left lists events that could lead to increased demand. The graph on the right lists

events that could lead to decreased demand.

6a7 $ list of factors that can cause an increase in demand from *te&t D@-D-D, start subscript, -, endsubscript to *te&t D@DD, start subscript, , end subscript. 6b7 The same factors, if their direction isreversed, can cause a decrease in demand from *te&t D@-D-D, start subscript, -, endsubscript to *te&t D@DD, start subscript, , end subscript.

"hen a demand curve shifts, it will then intersect with a given supply curve at a dierent equilibrium

price and quantity. "e are, however, getting ahead of our story. Gefore discussing how changes indemand can aect equilibrium price and quantity, we #rst need to discuss shifts in supply curves.

Key points

!he law of supply states that a higher price leads to a higher quantity supplied and a lower

price leads to a lower quantity supplied.

upply curves and supply schedules are tools used to summarize the relationship between

supply and price.

upply of goods and services

"hen economists tal' about supply, they mean the amount of some good or service a producer is

willing to supply at each price. 4rice is what the producer receives for selling one unit of a good or

service. $ rise in price almost always leads to an increase in the quantity supplied of that good or

service, while a fall in price will decrease the quantity supplied. "hen the price of gasoline rises, for

e&ample, it encourages pro#t8see'ing #rms to ta'e several actions: e&pand e&ploration for oil

reservesI drill for more oilI invest in more pipelines and oil tan'ers to bring the oil to plants where it

can be re#ned into gasolineI build new oil re#neriesI purchase additional pipelines and truc's to ship

the gasoline to gas stationsI and open more gas stations or 'eep e&isting gas stations open longer


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hours. Economists call this positive relationship between price and quantity supplied—that a higher

price leads to a higher quantity supplied and a lower price leads to a lower quantity supplied—the

law of supply. The law of supply assumes that all other variables that aect supply are held

constant.

upply schedule and supply curve

$ supply schedule is a ta#le that shows the quantity supplied at each price.

$ supply curve is a graph that shows the quantity supplied at each price.

(ere)s an e&ample of a supply schedule from the mar'et for gasoline.

Price (per gallon) Quantity upplied (millions of gallons)

*+.--+.--dollar sign, , point, -- 3--3--3--

*+./-+./-dollar sign, , point, /- 33-33-33-

*+.1-+.1-dollar sign, , point, 1- 2--2--2--

*+.2-+.2-dollar sign, , point, 2- 21-21-21-

*+.-+.-dollar sign, , point, - 2-2-2-

*+/.--+/.--dollar sign, /, point, -- 0--0--0--

*+/./-+/./-dollar sign, /, point, /- 0/-0/-0/-

4rice is measured in dollars per gallon of gasoline and quantity supplied is measured in millions of

gallons.

(ere)s the same information shown as a supply curve with quantity on the horizontal a&is and the

price per gallon on the vertical a&is. 5ote that this is an e&ception to the normal rule in mathematics

that the independent variable goes on the horizontal a&is and the dependent variable goes on the

vertical.

A supply curve for gasoline

The graph shows an upward8sloping supply curve that represents the law of supply.


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The supply curve is created by graphing the points from the supply schedule and then connecting

them. The upward slope of the supply curve illustrates the law of supply — that a higher price leads

to a higher quantity supplied, and vice versa.

The shape of supply curves will vary somewhat according to the product: steeper, 9atter, straighter,

or more curved. 5early all supply curves, however, share a basic similarity: they slope up from left to

right and illustrate the law of supply: as the price rises, say, from *+.--+.--dollar sign, , point,-- per gallon to *+/./-+/./-dollar sign, /, point, /- per gallon, the quantity supplied increases

from 3--3--3-- gallons to 0/-0/-0/- gallons. %onversely, as the price falls, the quantity supplieddecreases.

!he di"erence #etween supply and quantity supplied

!n economic terminology, supply is not the same as quantity supplied. "hen economists refer to

supply, they mean the relationship between a range of prices and the quantities supplied at those

prices, a relationship that can be illustrated with a supply curve or a supply schedule. "hen

economists refer to quantity supplied, they mean only a certain point on the supply curve, or one

quantity on the supply schedule. !n short, supply refers to the curve and quantity supplied refers to a

speci#c point on the curve.

Jey points

upply curves can shift: %hanges in production cost and related factors can cause an entire

supply curve to shift right or left. This causes a higher or lower quantity to be supplied at a given

price.

!he ceteris pari#us assumption: ?upply curves relate the prices and quantities supplied

assuming no other factors change. This is called the ceteris paribus assumption. This article tal'sabout what happens when other factors aren)t held constant.

The ceteris paribus assumption

$ demand curve or a supply curve is a relationship between two, and only two, variables: quantity on

the horizontal a&is and price on the vertical a&is. The assumption behind a demand curve or a supply

curve is that no relevant economic factors/ other than the product0s price/ are changing.

Economists call this assumption ceteris paribus, a . !f

all else is not held equal, then the laws of supply and demand will not necessarily hold. The rest of

article tal's about what happens when other factors aren)t held constant.

(ow production costs aect supply

$ supply curve shows how quantity supplied will change as the price rises and falls, assuming ceteris

paribus so that no other economically relevant factors are changing. !f other factors relevant to

supply do change, then the entire supply curve will shift. $ shift in supply means a change in the

quantity supplied at every price.


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?ay we have an initial supply curve for a certain 'ind of car. 5ow imagine that the price of steel, an

important ingredient in manufacturing cars, rises, so that producing a car has become more

e&pensive.

hifts in supply A car e*ample

The graph shows supply curve ? sub - as the original supply curve. ?upply curve ? sub represents a

shift based on decreased supply. ?upply curve ? sub / represents a shift based on increased supply.

$s a result of the higher manufacturing costs, the supply curve shifts to the left, toward *te&t ?@??, start subscript, , end subscript. ;irms will pro1t less per car, so they are motivated to ma2e

fewer cars at a given price, decreasing the quantity supplied.

$ decrease in costs would have the opposite eect, causing the supply curve to shift to the right,

toward *te&t ?@/?/?, start subscript, /, end subscript. ;irms will pro1t more per car, so they aremotivated to ma2e more cars at a given price, increasing the quantity supplied.

Ather factors that aect supply

!n the e&ample above, we saw that changes in the prices of inputs in the production process will

aect the cost of production and thus the supply. ?everal other things aect the cost of production,

too.

5atural conditions

!n /-1, the Kanchurian 4lain in 5ortheastern %hina, which produces most of the country)s wheat,

corn, and soybeans, e&perienced its most severe drought in 3-3-3- years. $ drought decreases thesupply of agricultural products, which means that at any given price, a lower quantity will be

supplied. %onversely, especially good weather would shift the supply curve to the right.

5ew technology


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"hen a #rm discovers a new technology that allows the #rm to produce at a lower cost, the supply

curve will shift to the right as well. ;or instance, in the C2-s, a maFor scienti#c eort nic'named the

Breen Levolution focused on breeding improved seeds for basic crops li'e wheat and rice. Gy the

early CC-s, more than two8thirds of the wheat and rice in low8income countries around the world

was grown with these Breen Levolution seeds—and the harvest was twice as high per acre. $

technological improvement that reduces costs of production will shift supply to the right, so that a

greater quantity will be produced at any given price.

Bovernment policies

Bovernment policies can aect the cost of production and the supply curve through ta&es,

regulations, and subsidies. ;or e&ample, the .?. government imposes a ta& on alcoholic beverages

that collects about *++dollar sign, billion per year from producers. Ta&es are treated as costs bybusinesses. (igher costs decrease supply for the reasons discussed above. Ather e&amples of policy

that can aect cost are the wide array of government regulations that require #rms to spend money

to provide a cleaner environment or a safer wor'placeI complying with regulations increases costs.

$ government subsidy, on the other hand, is the opposite of a ta&. $ subsidy occurs when the

government pays a #rm directly or reduces the #rms ta&es if the #rm carries out certain actions.;rom the #rms perspective, ta&es or regulations are an additional cost of production that shifts

supply to the left, leading the #rm to produce a lower quantity at every given price. Bovernment

subsidies reduce the cost of production and increase supply at every given price, shifting supply to

the right.

?umming up factors that change supply

The graph below summarizes factors that change the supply of goods and services. 5otice that a

change in the price of the product itself is not among the factors that shift the supply curve. $lthough

a change in price of a good or service typically causes a change in quantity supplied or a movement

along the supply curve for that speci#c good or service, it does not cause the supply curve itself to

shift.

.actors that shift supply curves

The graph on the left lists events that could lead to increased supply. The graph on the right lists

events that could lead to decreased supply.


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6a7 $ list of factors that can cause an increase in supply from *te&t ?@-?-?, start subscript, -, endsubscript to *te&t ?@??, start subscript, , end subscript. 6b7 The same factors, if their direction isreversed, can cause a decrease in supply from *te&t ?@-?-?, start subscript, -, endsubscript to *te&t ?@??, start subscript, , end subscript.

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