Transcript for:
Understanding Market Demand and Pricing

this video will define and explain the term Market as well as define and explain demand and the law of demand it will also show you how to draw a demand curve so before we start explaining um what demand is we have to first become familiar with the term Market what is a market well basically a market is a place where buyers and sellers meet the sellers have a specific good or service that they want to sell and the buyers have money so a market is a place where buyers and sellers meet to exchange goods or services for money now remember a market does not have to be a physical place it can be a virtual online space so we've got Amazon we've got eBay markets don't actually have to be physical places where buyers and sellers go to physically so let's take a look at the buyers side of the market the B the buyers are the ones that demand the product so the demand comes from the buyers what's the meaning of this word demand well basically demand is the quantity of a good or service that consumers or buyers are willing and able to purchase at a given price in a given time period so to look at demand you have to look at a certain price a given price over a certain time period and see how much of that good or service that the buyers are both willing and able it's not enough to just want the product to be willing to buy it you have to actually be able to buy it so Mr Mo for example he wants a Porsche but I am not part of the demand for Porsche because I surely cannot afford to purchase a porch I'm not able to buy a porch so demand has to actually be effective demand this is what economists call it effective demand is demand where the consumers or the buyers are both willing and able to buy the product at a certain price or a given price in a given time period so what's the law of demand or what is this whole demand theory about well basically the law of demand states that cerus paribus which means other things held constant as the price of a product Falls the quantity demanded of that product will usually increase so Seterus parabus as price Falls quantity demanded will increase as price Rises quantity demanded will fall both of these conditions it's important to hold the Assumption of cerus parabus which means other things held constant so why is the relationship between price and quantity demanded as such Why is the law of demand as such well basically economists will say that this is down to two things the income effect and the substitution effect remember how I said the law of demand assumes that other things are held constant it assumes seter is parabus so one of the things that's held constant is income If We Hold income constant if the price of a product Rises and because we assume that income is held constant naturally consumers will buy less of the product right because their income hasn't changed so that's one way of explaining it and the opposite is true if price Falls and income is held constant naturally we will assume that consumers can afford to purchase more another way of explaining the law of demand is the substitution effect uh because we assume other things are held constant that includes the prices of substitutes so if you have a look at Coca-Cola and Pepsi for example if the price of Coca-Cola Rises we assume because in the law of demand we assume set's parabus we assume the price of Pepsi hasn't changed so naturally now that c call is more expensive consumers will switch to a close substitute so because they will switch and purchase more Pepsi the quantity demanded for Coca-Cola will naturally fall and the opposite is true if the price of Coca-Cola Falls and the price of Pepsi Remains the Same people will buy more Coca-Cola because they will substitute they will buy more Coca-Cola instead of Pepsi so the income effect and the substitution effect both explain why price and quantity demanded are inversely related so how is the law of demand represented or Illustrated visually well basically this is done through the demand curve I have drawn here a demand curve for soft drinks so we're looking at the market for soft drinks because we know price and quantity are negatively related or they're inversely related when price Rises quantity demanded will fall and the opposite is true when price Falls quantity demanded will increase and this is what the demand curve looks like now we know that when there is a change in price this will cause a movement along the demand curve which will result in changes in quantity demanded it's very important to use these terms changes in price so price Rises or Price Falls we know that when when price Rises quantity demanded will decrease when price Falls quantity demanded will increase and these are represented through movements along the demand curve so changes in price cause movement along the demand curve from one point to the other now there is a difference between individual demand for a product and market demand and it's a pretty easy difference to understand basically market demand is the sum of all individual demands for a good or service it's the total quantity demanded by all consumers in that market so basically if you know that there are 10 consumers in the market and you know the quantity demanded of each consumer at a given price at that given price just add the total quantity standard of all the 10 consumers and that would give you the market demand at that price now if you do the same for each price so at all other prices at a given Price look at what the total quanti demanded is that can help you plot or Draw the market demand curve