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The Downward-Sloping Demand Curve & the Upward-Sloping Supply Curve Video

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  • 0:02 Supply and Demand
  • 0:42 Demand
  • 3:36 Supply
  • 5:04 Lesson Summary
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Lesson Transcript
Instructor: Christopher Sailus

Chris has an M.A. in history and taught university and high school history.

In this lesson, we explore two characteristics of capitalist economies that help economists chart the marketplace: the laws of supply and demand. We will also discuss their corresponding graph curves.

Supply and Demand

Whenever you turn on the news, you probably hear a lot about the price of oil, such as whether it's going up or going down, and why it's trending in either direction. The price of oil is important for everyone in our society, from you and me to multibillion dollar companies. It tells us whether it's going to cost us $20 or $40 to fill up our car in the morning and whether global businesses are going to spend 20 million or 40 million dollars on shipping costs next month. In other words, it's a big deal.

But the price of oil, like just about every other commodity, is subject to the laws of supply and demand. In this lesson, we'll explore these two economic models, their characteristics, and the factors that can manipulate them.

Demand

The law of demand states, rather simply, that if the price of a good or service goes up, the corresponding demand for the product will decrease. This is a natural thing; after all, if you have four dollars and apples go up in price from $1 to $2, you can only buy half as many apples as you could before! Your demand for apples, in other words, has decreased by half. This same law can be extrapolated to the entire marketplace. Over time, economists have developed demand schedules to roughly track the demand for certain products at each price.

As a demand schedule example shows, the demand for the price of a can of soda is markedly different depending on the soda's price; at only $0.25, the public is willing to purchase a whopping 890 cans! As the price goes up, the amount of soda the public is willing to purchase drops dramatically, until only 100 cans are bought at a price of $2.75 each.

These demand schedules can be plotted onto a graph, creating a demand curve. As you might guess, the demand curve usually slopes downward, like this:

Demand Curve
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Demand curves usually drop more precipitously at the beginning; for example, notice the 390-can drop in demand in the schedule of soda cans from before, when the price was raised just $0.25!

Graph for example
graph for soda can example

At higher prices, however, the demand drops at a slower rate with each price increase. After all, there's always a segment of the population that is able and willing to buy a can of soda whether the price is $0.20 or $20!

Though price is the most important thing that affects the demand curve, it is by no means the only thing. Various factors and characteristics of consumers affect the demand curve of each product. One example is the substitution effect. The substitution effect refers to consumers' willingness to buy a product they view as similar to another product if the price for that first product is markedly cheaper than the second.

For example, say you like both oranges and bananas, but you always buy bananas because you can get a banana for $0.50, and oranges cost $0.80. Well, if oranges dropped in price to lower than $0.50, you'd likely buy an orange instead of a banana, hence lowering the demand of bananas, even though their price has remained unchanged. While fruits and other foodstuffs are often subject to the substitution effect, other goods are not. Oil, for example, is generally unaffected by the substitution effect; after all, what else are you going to put into your car?!

Of course there are many other factors unrelated to the items themselves that affect the demand for each good. Income, for example, greatly affects demand. If the average income of a country goes up, it's likely that demand for goods will go up in the country because more people can afford to buy more things. Personal preferences and cultural fads also impact demand, such as when hordes of hipsters decide donuts, cauliflower, or whatever other seemingly mundane item is the new 'in' thing to eat, use, or wear.

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