 Hello, and welcome to the session in which we'll discuss the law of demand. Now, this topic is covered on the CPA exam, and I'm covering this topic for CPA exam candidate. Now, if you're taking a macroeconomic course, yes, it will help you understand this concept. However, I may not go as much in depth as a macro or a microeconomic course will go in terms of law of demand. To explain the law of demand, we're going to be looking from the buyer's perspective. Now, let me ask you this question. What happened if the prices of something you like to buy, the price of something you like to buy, and let's assume we're buying pizza, the prices of pizza go down. Everything else is equal. What do you think you will do if you like the pizza? Well, most likely the quantity that you like to consume goes up because the price is going down. And let's assume the opposite is true. When the price of a slice of pizza goes up, assuming also you have a limited budget, but you like to consume pizza, assuming you have a limited budget and the prices goes up, your quantity that you demanded for that pizza, you will demand less. So this is what we're going to be discussing. The law of demand, price, quality, and the changes in quantity and changes in demand. So let's go ahead and get started. Before we proceed any further, I have a public announcement about my company, farhatlectures.com. Farhat Accounting Lectures is a supplemental educational tool that's going to help you with your CPA exam preparation, as well as your accounting courses. My CPA material is aligned with your CPA review course, such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions, as well as exercises. Go ahead, start your free trial today. So as the prices fall for any particular product, the quantity demanded rise. Why? Because it's cheaper to buy, assuming you like to buy the product and you have the ability to do so. And the opposite is true. As the prices of the slices of pizza rises, the quantity demanded, you're going to demand less units, less units of pizza. Simply put, just kind of price goes up, quantity goes down. We say there is a negative or an inverse relationship. Let's go ahead though and graph this relationship. So of the price per pizza, per one slice of pizza is a dollar, and I don't believe it was a dollar when I was in college, but let's assume that's the case to illustrate the point. If the price, so this is on the Y axis, remember the Y looks like this, the Y. So on the Y axis we have the price and on the X axis we have quantity. So if the price of a slice of pizza is a dollar, you would buy 80 slices during the semester. Now if the price goes up from a dollar to two, you're going to have to cut down on your consumption because the price went up, you will consume for at two dollars, at two dollars, you will consume only around 58 pizzas. I'm sorry, 55. Just you know, assume this is 55. At three dollars, well, the prices is increasing. When I was in college, it was between a dollar and two. And at some point it will be less than a dollar. But right now, at least three dollars, you cannot find a slice of pizza less than three dollars where I teach at least. If it's three dollars, three dollars, you would only consume 35 slices at four dollars. Well, the prices are getting higher, you really can't afford it. You will consume around 20 slices. At five dollars, you're really going to have to cut down your consumption and you're going to consume approximately 10 slices. Now what we're going to do, we're going to basically go ahead and graph those points. And what we see, we see a downward slope, a negative slope. And this is what I meant by the price and quantity, the price and quantity, there is a negative relationship between price and quantity. It's a negative relationship. When one goes up, the other one goes down. When one goes down, the other one goes up. There's an inverse relationship. And this is an important concept, law of demand. It's a downward slope, negative slope, inverse relationship between price and quantity. And let's assume the prices keep on going higher and higher. And at some point, you just say, I'm not going to consume anything. If the slice of pizza is $10, you may say, I'm going to consume zero. So you'll be on the high access. So just kind of, I want you to imagine what would happen as the prices go up. At some point, you will stop consuming. Now, what we did here is we looked at the price versus quantity demanded. Is this the only thing that could affect the demand of pizza? No, there are other factors that could affect the aggregate demand of pizza. We might have other factor that result in the change in demand. Well, what we did here, kind of before we talked about change in demand, what we did here is looked at the price versus quantity, as I just mentioned, and the changes were along this line. So the change was due, the quantity demand, the quantity demanded was due to a change in price. There are other factors that could change the demand, the aggregate demand other than the price. So the price could stay the same, but the quantity demanded could increase, which is shifting to the right. Shift, we shift the whole curve to the right, the increase in demand, or sometime things could happen that could shift the quantity demanded to the left, which would lead to a decrease in demand. Something other than price, something other than price could shift the whole quantity demanded. What could be some reasons? For example, let's start with change in consumer taste. And by the way, if you're kind of, if you're like, how do I remember, kind of if you want to remember, how do I know whether to the right is increased to the left is increased? Think about it. If you shift to the left, if you keep shifting to the left, at some point you would reach zero, you demand zero, right? So shifting to the left means you are decreasing. Okay. And if shifting to the left is decreasing, it means shifting to the right, you are consuming more. Actually, just just by just by looking at this at $2 at $2, you are demanding rather than 11, you are demanding 16. I mean, you could physically, you could visually see it. If you want to just in case you're wondering, just as how you will, how you will, how you remember it. So it could be some factors other than price that could affect the change in demand. Well, change in consumer taste. Let's assume there was a new study that shows that if you consume pizza on a regular basis, it increases your IQ just just for the sake of illustration. Okay, so as a college students, you would say, guess what, I'm going to consume pizza. Why? Because if I consume pizza, my IQ will go up, my GPA will go up. Just making a joke. Or the opposite is true. Let's assume there was a new study that shows that pizza is extremely harmful to your health. Well, consumer taste is changing. Then you will, it will, your demand will shift to the right. So although the price is a dollar, remember, at prices, a dollar, you are demanding 16. The price at a dollar. Now you will be demanding nine. Why? Because there was a shift in consumer taste. It has nothing to do with the price. It could be change in the number of buyers, going back to college, to college campuses. If you have more students on campus, if you have more students, some of these students will consume pizza, will purchase pizza. If the price stayed the same, you have more people consuming pizza. Just it doesn't matter. At $2, we used to have 11. Now at $2, we're going to have approximately the demand for 17. Not because the price changed. Just the number of students went up. And the opposite is true. Like after COVID, many students are not taking classes on campus. So you have less students on campus. What's going to happen? Because you have less students, less buyers, less buyers in the market. The quantity demanded will go down. It has nothing to do with the price. Another reason that could affect the demand is that could shift the demand left or right is the change in income. Are you making more money or less money? But when it comes to change in income, we have to differentiate between two types of goods. Normal goods and something called inferior goods. What are normal goods? Normal goods are goods that we buy more, we buy more of as our income increases. A good example will be if we have more money, we might consume more lobster, more steak. Most of the goods that we buy are normal goods. If we assume we like to consume more, so the goods that we buy are normal goods. And we buy fewer normal goods when our income decreases, when our income goes down and we cut down on certain things because we cannot afford them. Why we cannot afford them? Because our income shifted down, then those are normal goods. So under normal goods, if we have more money, we buy more of them. If we have less money, we pay less of them. We buy less of them. Versus if the good is inferior, inferior goods are goods that we buy more of as our income increases. So our income goes up, we consume less of those. We buy fewer inferior goods if our income increases. Now I'm going to go back and I still remember when my professor, Dr. Bajwa, in my macroeconomic class, explained this concept. And I still remember, he said, as you consume, as your income goes up, you are going to consume more filimignon, fish food, steak, lobster, and you're going to be consuming less of McDonald's and Burger King. I was sitting in the class thinking to myself, you know, I was a 19 year old, recent immigrant to the U.S. I used to love McDonald's. So I was like, no way. If I make more money, I'm going to eat every day at McDonald's, right? Like a, like a small kid. But I still remember that concept. But it is true. Once I make more money, you buy less of McDonald's. For one thing, it is, it's not healthy. One, two, you get sick of it real quick. So, so the point is, for example, McDonald's is an inferior good. So you will buy less of McDonald's when your income goes up and you will buy more of normal goods, like lobster steak. I don't care about lobster, but I like steak. So that's the point. So as your, as the income goes up in a nation, in an economy, they will consume more of normal goods. So the quantity, the, the, the, there will be a shift in the demand curve. This is called the curve, shift in the curve itself because the price is shift along the curve. The demand is shift, shifting the whole curve right and left. Let's look at other reasons that could affect the change in demand and shift the curve to the right or shift the curve to the left. What other factors? Changes in prices of related goods. Again, we have two types, not again, we have two types of related goods. It's like we have for the, what other factors could shift the demand curve to the, the demand curve to the right or the demand curve to the left. The left means you are consuming less because as you keep shifting to the left, at some point you'll get the zero. In case you're wondering, is the left increasing or decreasing? Again, you could just kind of choose a point and you will see, for example, this point here, this is the curve to the outside at two dollars, you are demanding more. You are demanding more. It means there was an increase in demand, although the price stayed the same. Changes in prices of related goods. Well, we have two types of related goods. We have complementary goods. What are complementary goods? Complementary goods are goods that are consumed jointly with the goods that you are studying. For example, you said we are studying pizza. Let's assume you consume, you consume soda with pizza, Coca-Cola or Pepsi. So those two goes together, complementary goods. What happened if the price of the coke goes up? If the price of the coke goes up, your meal, if you like to consume pizza and Coca-Cola, goes up in price. As a result, if the price goes up, if the price of the complementary good goes up, you will consume the quantity demanded for this whole meal will go down. And the opposite is true. If the price of the Pepsi goes down, now you have more reason to buy the pizza because the soda that comes with the pizza is cheaper. So it's a cheaper meal. When the prices of one complement decrease, the demand for the other increase and the opposite is true. Another type of related good is called substitute goods. So we're going to assume for the sake of illustration, every night you have two options. You're going to have a pizza, you can have a pizza or you don't care whether you have a pizza or a burger. Those are substitute goods for you. Well, guess what? If the price of the burger goes up and the price of the pizza stays the same, most likely you would stick with consuming pizza because the price of substitute went up. The opposite is true. If the price of burgers goes down and the price of the pizza stays the same all go up, you will consume more of burgers and less of pizza. So if the prices of one good increases, the demand for the substitute increases as well. So if the price of the burger goes up, you will consume more of pizza and if the price of the pizza goes up, you'll consume more of burger, assuming they are substitute. Change in consumer expectation. That's an important concept to understand. Your expectation, what do you think is going to happen in the future? What do you think is going to happen in the future? Future prices. For the sake of illustration, let's assume next year or the next three months, the local county, the local county, it's going to tax all pizzas and on campus they're going to place $1 surcharge on every slice just for the sake of illustration. So if the future prices are going to go up because we're going to be imposing taxes on each slice of pizza, why do we do that? We want to reduce the consumption of pizza. Why? Let's assume for health reasons. So what's going to happen? If in the future we're going to increase the taxes on pizza, everyone's going to consume now. Why? Because you want to consume before it gets expensive and the opposite is true. If there was a tax on the pizza and you know they're going to take the tax away because they said they don't think it's working, then you wait until you buy the slice of pizza at a cheaper rate. Future income and this is extremely important in economy. How citizens feel about their future income, their future income. What's going to happen is this. If you look at the future and the future looks good, the future looks promising, what's going to happen? You are going to buy more of things now. Why? Because you're telling yourself look I'm going to be earning this, I'm going to be earning more money in the future as a result. I'm going to buy more because my future income is going to increase. Now the opposite is true. If you think we're going to go through a recession, if you think you're going to be losing your job, if you think there's any risk and your income is going to decrease in the future, again this is future income not current income, you will start to cut down now and that's why when we discuss leading economic indicators they measure something called consumer confidence. We want to know how confident is the consumer, especially in an economy like the United States, where two-third, which is approximately 67, 66 to 67 percent of the economy is based on the consumer. So if the consumer is not confident about the future, the consumer will cut down and as a result once they cut down the GDP will contract, will will go down as well. Same concept for supply and demand. If the future looks good we're going to start to increase the income now. But what's interesting about future expectation is it's it's it's kind of self-fulfilling prophecy. If the overall people thinks we're going to go into a recession, what would people do? They will start to slow down their consumption now and because they slow down their consumption now, indeed will go into a recession. So it's kind of a self-fulfilling prophecy. So those are the things that could change, that could shift the curve to the right or shift the curve to the left. Increase demand or decrease demand. Remember we have two types of shifting. Shift along the curve and that has to do with the price and shift the curve itself to the right or to the left. So make sure you differentiate between the two. To the right we increase demand, to the left we decrease demand. So what's the expectation next? The expectation next we're going to look at the law of supply because we have demand and we have supply. What should you do now? Go to the Fahad Lectures, look at additional MCQs, lectures that's going to help you understand this concept better, especially if you are a CPA exam candidate. You want to practice as many MCQs as possible for the econ. Those are easy points, you should ace your econ section. Good luck, study hard, invest in your CPA and stay safe.