A Deeper Look at the Demand Curve
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Here's what sounds counter-intuitive in this lesson and the last one: You say that as the price of oil (or any good) decreases, the quantity demanded is going up. But my real world experience says the opposite. A local store in my neighborhood has been selling posters from the 2014 World Cup. When they first started selling them, there was a high quantity of posters demanded by people in this town and the store was charging $10/poster. But now, demand has decreased - less people are interested in the poster (since it is old news). So, the store has had to slash prices to $5/poster, and now to $2/poster as the demand has decreased.
Can you clear up my confusion here? Is this a case in which the language involved is creating a misunderstanding of the concept?
In the scenario you describe, the demand curve is shifting down over time as people lose interest in the poster (being old news). As the demand curve drops, the equilibrium point where it intersects the supply curve also drops.
I suspect this will be covered in the next video (The Demand Curve Shifts).
The confusion clears up as soon as you become familiar with the difference between DEMAND and QUANTITY DEMANDED. The demand is the whole curve, showing the quantity demanded at ANY given price. The quantity demanded is each single point on a specific demand curve. In your example, it's not the quantity demanded of posters that went down, but the demand itself! When the posters were fresh, there were many willing buyers for them at a price of 10$. As they got older and older, at the same price there were less and less willing buyers. It's not a movement ALONG the curve. It's the whole curve moving down and to the left as the demand shrinks. Over time, you're looking at AN ENTIRELY DIFFERENT CURVE. Confronted with this new curve, which reflects a lower DEMAND (at ANY given price, there are now less buyers), the store had to LOWER the price, in order to bring the QUANTITY DEMANDED back up again (and sell the leftover stock of posters). Time changes the demand. Price, instead, is the one thing that can NEVER change the demand, but can only ever impact the quantity demanded.. If it isn't next lesson, it's the one after that. You'll see... :)
I'm no expert, but I think the answer is that the lower the price goes, the more posters will theoretically be demanded. The elasticity or steepness of the curve may vary, but the principle still works that if they lower the price more people will be willing to buy them and thus more posters will be demanded.
It seems to me that the demand curve for the 2014 World Cup posters were quite inelastic or slightly vertical. This could be the case because, as James mentioned, the store was charging " 10 per poster." As long as World Cup fever persisted, suppliers could set this price and customers gladly went along. After all, buying a poster is not like purchasing a car. The Poster's cost relative to the average person's income in a developed country is small. But that same cost to a fan is even less of an issue. Thus, an impulse buy occurs. However, as time passes, and lets says your club is knocked out of the tournament then the value to you and other heart broken fans of owning the poster that reminds you of that tragic lose is most likely going to remain zero. In fact, only the fans who's club was still standing at the end would continue to demand such a poster. Therefore, it takes a drastic reduction in price to even move a small amount of inventory. So to recap, at the beginning producers could charge whatever they wanted for the posters so long as it remained a small percentage of a fan's disposable income, but once a champion had been crowned, all other fans of the sport no longer had a reason to purchase such a poster. That meant that even at two dollars per poster the stores couldn't even give those things away. In short, being a supplier in a market with an inelastic demand is great when people are clamoring for your product, but as people's taste changes you might find yourself bankrupt trying to sell a good that nobody wants.
Just to add the little I have learnt to the above conversation. First and foremost remember that the explanation in the videos are theories and do not hold in some cases for real life situations due to the fact that real life situations are complex and there are many considerations to be taken into account. Secondly, it will be incorrect to look at the question you posed in a simplistic sense of the word, by that I mean the demand for the 2014 World Cup posters was event specific and hence after the event the value of the posters to consumers would have falling drastically over time and hence reflective of the price if all other things were held constant (cet. par.) (income and substitution effects) for example. In summary the demand curve does not describe the event, and by that I mean it doesn't describe how much posters an individual or group of people actually bought but rather a "hypothetical relationship" that tells us how much an individual would be prepared to buy at each price, in a given time period cet. par.
Just to buttress the [point the original question was highlighting, read about the Giffen good. This is a good where at higher prices a larger quantity is demanded.
Vincent's explanation above does make sense if your question was framed to suite his answer :).
I don't understand what is meant by "consumer surplus." A Surplus of demand? A Surplus in the quantity of the unpurchased good? Doesn't "surplus" necessarily imply a surplus of something?
It's a surplus of wealth. Here is how it works: let's say I want a new smartphone, and I am willing to pay $200 to get one. In other words, for me, having a smartphone is the same as having $200, and I am equally happy either way. But let's say I go to the store, and see that they are selling smartphones for only $150 dollars, so of course I buy one.
Now, when I walked into the store, I had $200 in my pocket, which remember is the same to me as 1 smartphone. But when I walked out of the store, I had a smartphone, which is equivalent to $200, AND $50 more dollars, so it is like I have $250. I have gained $50! This is my surplus.
I have not "really" gained any physical money, but I am as pleased with my possessions now as I would be if I had $250 and no smartphone. Because this is $50 more than I had before, we infer that I am happier than I was before, and we are going to measure this happiness in dollars because this is an economics class ;)
Similarly, the store likely values those phones at less than $150 each, so it also gains a surplus when I buy one.
"...[A]t a lower price, quantity demanded is greater." But why does the demand curve slope downward?
The question was: "What should happen to the “demand for speed” (measured by the average speed on highways) once airbags are included on cars?"
It's clear to me that safer cars lead to increased "need for speed," but I'm not following how you'd demonstrate this on a demand curve.