-
In this video, we're going to
dive deeper into the demand curve
-
by building one together
-
and then learning two different
ways to read a demand curve.
-
So let's start with the
definition of a demand curve.
-
A demand curve is a function
-
that shows the quantity demanded
at different market prices.
-
That's a bit mysterious,
so let's take an example
-
of the market for oil, and then
build a demand curve together.
-
Here's a hypothetical table of data
that shows the amount of oil bought
-
at different market prices.
-
Suppose that at a price of
fifty five dollars per barrel,
-
the quantity of oil demanded would
be five million barrels a day.
-
At a lower price, say
twenty dollars per barrel,
-
the quantity of oil demanded
is going to be higher,
-
say twenty five million barrels a day.
-
And at an even lower price,
five dollars per barrel,
-
the quantity of oil demanded would
be fifty million barrels a day.
-
Let's convert these into a graph with
the price of oil on the vertical axis
-
and the quantity of oil
demanded on the horizontal axis.
-
We can now graph our three points.
-
And connect them with a line.
That's the demand curve for oil.
-
It shows us the quantity
demanded at each price.
-
Immediately, we see a key
feature of the demand curve,
-
which is that it slopes downward.
-
At a lower price, the quantity demanded
is greater. That makes intuitive sense.
-
If the price is lower, you'll buy more.
-
Now let's discuss the two
ways to read a demand curve.
-
We'll start with the horizontal method.
-
We begin by reading the price,
say fifty five dollars per barrel,
-
then read horizontally
over to the demand curve,
-
and then down to find that at that price,
-
buyers are willing and able to purchase
five million barrels of oil per day.
-
At a price of twenty dollars per barrel,
-
buyers are willing and able to purchase
twenty five million barrels of oil.
-
At a price of five dollars per barrel,
-
buyers are willing and able to
purchase fifty million barrels of oil.
-
The second way of reading the
demand curve, the vertical method,
-
begins at the bottom and works its way up.
-
It tells us the value
-
or the maximum price that buyers are willing
to pay for a particular barrel of oil.
-
We pick a quantity along the x axis,
-
say, the five millionth barrel of oil,
-
and then read up to find the value of
that barrel of oil, or in other words,
-
the maximum amount that buyers are
willing to pay for that barrel,
-
which is fifty five dollars.
-
How about the twenty five
millionth barrel of oil?
-
We can read up from the horizontal axis
-
and then over to see that the maximum
-
buyers are willing to pay is twenty
dollars for that barrel of oil.
-
Both ways of reading the
demand curve are useful
-
for solving different kinds of problems.
-
The horizontal reading tells us the
quantity demanded at a given price.
-
The vertical method tells us how much
buyers value a particular barrel of oil.
-
The demand curve is a
fundamental tool in economics,
-
so please be sure to practice building it
and reading it until you've mastered it.
-
If you're
-
a teacher, you should check out our supply
and demand unit plan that incorporates
-
this video. If you're a learner,
-
make sure this video sticks by answering
a few quick practice questions.
-
Or if you're ready for more
microeconomics, click for the next video.