Youtor
Basic Demand Theory
YOUR LINK HERE:
http://youtube.com/watch?v=DQ113X5fXpw
http://economicsdetective.com/ • In this video I'm going to talk about the demand curve. As I said in a previous video, a demand curve is the relationship between the price of a good and the amount of that good consumers demand. • Let's say we have an agent. We'll call him Ezekiel. Ezekiel's utility is derived from his consumption of carrots and from his consumption of everything else, which we'll measure in dollars. We're going to make a very important assumption about Ezekiel's utility function, we're going to assume it's strictly quasi-concave. • What this means is that if you pick any two points on a given indifference curve, a line drawn between those points will fall entirely above that indifference curve except at the end points. We're also going to assume that Ezekiel is insatiable, so he always prefers more to less. • Now, Ezekiel has a budget of $100. Let's say for now that a carrot costs $1. To draw Ezekiel's budget set, we start by graphing the point where he buys only carrots. At that point he has 100 carrots and nothing else. Then we graph the point where he buys no carrots, in which case he buys 100 dollars' worth of other things and no carrots. • Then we draw a line connecting those two points, and everything below or on that line is within Ezekiel's budget set, that is, every point within the set is a bundle which Ezekiel could buy with his $100. • Now I'm going to pick an arbitrary utility function for Ezekiel. As I said before, it's going to be monotonic-increasing and strictly quasi-concave. Let's look at some indifference curves. • There are some indifference curves that Ezekiel just can't reach at his current income, and there are some he can reach. As it turns out, with the assumptions I've made, the highest indifference curve Ezekiel can possibly reach is also the one that intersects his budget set at exactly one point. That means Ezekiel has one specific combination of carrots and other things that would make him happiest given his current budget and the current price of carrots, so that's what Ezekiel buys. • Now, at the price of $1, Ezekiel is buying 50 carrots. We can put that point on a new graph. Now let's say the price of carrots changes to 50 cents each. Now Ezekiel has a new budget set, since he can afford at most 200 carrots. Now he can reach a higher indifference curve by buying 75 carrots. Let's graph that point, too. • What we've just done is we've found two points on Ezekiel's demand curve for carrots. If we were to repeat this exercise many times, we would eventually reveal Ezekiel's entire demand curve for carrots. And if we wanted to find a demand curve for many consumers in an economy, all we'd need to do is find each of their individual demand curves and add them up.
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