Understanding the Law of Demand

Sep 12, 2024

Lecture Notes: Law of Demand

Introduction to the Law of Demand

  • Core concept in microeconomics.
  • Law of Demand:
    • Increase in price → Decrease in quantity demanded.
    • Decrease in price → Increase in quantity demanded.
  • Generally holds true; some exceptions exist (to be discussed in future lectures).

Key Definitions

  • Demand vs. Quantity Demanded:
    • "Demand" refers to the relationship between price and quantity demanded.
    • "Quantity Demanded" refers to a specific amount of a product demanded at a certain price.

Example: Demand for an E-Book

  • Hypothetical scenario of releasing a sci-fi e-book.
  • Conducted a market study to understand the relationship between price and quantity demanded.

Demand Schedule

  • A table showing the relationship between price and quantity demanded, assuming all else is equal (ceteris paribus).
  • Scenarios:
    • Scenario A: Price = $2; Quantity demanded = 60,000 units.
    • Scenario B: Price = $4; Quantity demanded = 40,000 units.
    • Scenario C: Price = $6; Quantity demanded = 30,000 units.
    • Scenario D: Price = $8; Quantity demanded = 25,000 units.
    • Scenario E: Price = $10; Quantity demanded = 23,000 units.

Demand Curve

  • Visual representation of the demand schedule.
  • Axes:
    • Vertical axis = Price.
    • Horizontal axis = Quantity demanded.
  • Points plotted from scenarios A to E.
  • Connects points for a continuous demand curve.

Understanding the Graph

  • Convention in Economics:
    • Typically, price is on the vertical axis, and quantity demanded is on the horizontal axis.
    • Contrary to most math/science conventions where the variable being changed is on the horizontal axis.

Clarification on Demand vs. Quantity Demanded

  • Demand: The entire relationship depicted by the demand schedule or demand curve.
    • A shift in the demand curve indicates a change in demand.
  • Quantity Demanded: A specific point on the demand curve.
    • Changes as you move along the curve due to a change in price, assuming all else is constant.

Conclusion

  • Important distinction between changing quantity demanded (movement along the curve) and changing demand (shifting the curve).
  • Future discussions will address changes in other factors affecting demand.
  • Note: Future lectures will cover exceptions and other influencing factors on demand.