Right now we're going to talk about demand, and since demand has to do with buyers and consumers, I'm going to explain it all consuming this gallon of milk.

So here we go, let's start it out.

That first taste of milk is just wonderful, right? Cold, refreshing.

The first thing you have to understand about demand is the law of demand, which says that there's an inverse relationship between price and quantity demanded.

That means when the price goes down, the quantity demanded increases.

And if the price goes down, the quantity demanded goes up again.

So take a look at this demand schedule.

As you can see, when the price goes down, the quantity demanded goes up.

When the price goes down to four, three, two, and one, the quantity demanded increases.

Now when you plot these points, you're gonna get a demand curve, which looks like this.

It's a downward sloping curve showing the law of demand.

Now there are three reasons why the demand curve is downwards sloping.

It's the reason for the law of demand, it's the substitution effect, the income effect, and the law of diminishing marginal utility.

Substitution effect says price goes down for milk, people are going to buy more milk, because they're going to move away from other products that are now more relatively expensive.

So instead of buying juice, people are going to turn around and go buy more milk.

Now that goes the other way, when the price goes up for milk, the quantity demand for milk's going to decrease.

Because people are going to move away from the milk and go find a different substitute product.

I wish I could find a substitute product.

Now the income effect says that when the price goes down, people buy more milk, because their purchasing power has increased.

So if you go to the store, and you find out that milk is on sale and it only costs one dollar for a gallon of milk, you're going to buy more because you can buy more.

The amount you can buy with each dollar has increased, and of course it goes the other way.

If the price goes up for milk, people are gonna stop buying milk, because their purchasing power has decreased.

Each dollar gets them less milk.

And the third reason for the law of demand is something called the law of diminishing marginal utility.

Remember utility is satisfaction and marginal is additional.

So this is the law of decreasing additional satisfaction.

The law says, as you consume anything, like milk, the additional satisfaction you're going to get, is going to start to eventually decrease, which is exactly what's going on right here.

That very first sip was super refreshing, but that last one not so much.

Now this law applies to somebody drinking sips of milk, but it also applies to purchasing gallons of milk.

That very first gallon of milk you get for your family, is awesome, it gives you a lot of satisfaction.

You can have your milk and cookies, you can eat your cereal.

Your second gallon of milk gives you some utility.

And the third gives you some utility, but the law says eventually, each additional gallon of milk that you consume is going to give you less and less additional utility.

This concept explains the law of demand, and the shape of the demand curve because they get people to buy more quantity of milk.

The price has to go lower, because they get less and less additional satisfaction from each gallon of milk.

It's getting warm. It's getting warm.

So a change in price goes along the demand curve, but if something else other than price changes, it'll actually shift the demand curve.

For example, let's say a study comes out that says milk causes baldness, that would cause the entire demand curve to shift left.

At every single price, people are going to buy less, and so the curve shifts to the left.

That's called a decrease in demand, the opposite is an increase in demand, and so at every single price people want to buy more.

So the demand curve shifts to the right.

Now there's five shifters, or determinants of demand.

These are the things that cause the demand curve to shift.

The first shifter of demand is taste and preferences.

For example, what if a new study comes out that says kids who have milk in the morning before they go to school, do better at school and they're smarter?

Well, that would increase the demand, the demand curve would shift to the right.

Another shifter would be the number of consumers.

What if all of a sudden, new customers come into town.

That's going to increase the demand for milk.

Another shifter is the price of related goods, substitutes and complements.

For example, almond milk and cows milk are substitutes for each other.

That's a bad idea.

So if the price goes up for almond milk, and it's more expensive to buy this, then the demand's gonna increase for cow's milk.

If the price goes down for almond milk, that means people are going to move away from buying cow's milk, buy more almond milk.

So the demand for cow's milk will fall, and of course there's also complements.

So when the price of cereal falls, that's going to increase the demand for milk.

Now the next shifter is income.

Income is a little tricky because it depends on the type of product, there's normal goods and inferior goods.

So let's say that milk was a normal good.

This means when there's an increase in income the demand's going to increase.

When there's a decrease in income, the demand's going to decrease.

An inferior good is just the opposite, when there's an increase in incomes the demand falls, and when there's a decrease in incomes the demand will go up.

So whenever you see a question that involves income, make sure to read the question carefully to find out if it's a normal good or an inferior good.

The last shifter of demand is a change in expectations.

So for example, if you think the price of milk is going to decrease next week, you're going to buy less today and so the demand will decrease.

But if you think the price is going to increase next week, you're actually going to buy a whole lot more today.

So that's going to increase the demand.

Now it's time to cover a super important detail that you have to watch out for.

It's the difference between a change in quantity demanded, and change in demand.

So look at this graph for milk, right now you see three points: A, B, and C.

And there's two ways to go from ten to twenty units. Movement from A to B along the demand curve is a change in quantity demand.

So when the price goes down from three dollars to two dollars, the quantity demanded goes up from ten to twenty.

Now A to C is a change in demand, price doesn't change, price stayed at three but people decided to buy more, why?

Well, because the five shifters, like taste and preferences that people prefer and want more milk then the entire demand curve will shift to the right.

At that same three dollar price, people want more so that's a change in demand.

It's a change in demand.

So I got a question for you, what happens to the demand when the price goes down?

Oh, gosh this is a bad idea!

So the answer is nothing.

When the price goes down, demand stays exactly the same.

Prices causes the quantity demanded to change. The only thing that changes quantity demanded is a change in price.

And the only thing that changes demand is one of the five shifters of demand.

Oh man, I think I'm lactose intolerant, I need those Cheerios.

We're good. We're good. And we're done.

Make sure to take a look at the next video which explains supply, the law of supply and the shifters of the supply curve.

Now don't forget to subscribe or leave a comment bellow, alright? Until next time.