The Market Forces of Supply and Demand

checker for the market forces of supply and demand this is perhaps the most important chapter in the textbook it's worth mentioning that investing extra time to master this chapter will make it easier for you to learn much of the subsequent material in this book this is one of the longest chapters in the textbook in the PowerPoint file this video lecture is one of the most graph intensive many of my students taking economics for the first time have difficulty grasping the grass however they are critically important to this chapter and all the subsequent chapters in the book and economics overall so on your behalf an extra degree of study is certainly appropriate and encouraged now we take a look at markets and competition a market is a group of buyers and sellers of a particular product a competitive market is one where there are many buyers and many sellers and each has a negligible or minimal effect on price in a perfectly competitive market all goods are exactly the same and buyers and sellers are so numerous that no one can affect the market price each is a what we call a price taker in this chapter we're gonna assume that markets are perfectly competitive in the real world there are relatively few perfectly competitive markets again let me emphasize perfectly competitive markets most Goods come in lots of different varieties including something like ice cream example given in the textbook and there are many markets in which the number of firms are small enough that some of them have the ability to affect the market price so again in the real world they're relatively few emphasis on perfectly competitive Marcus there are competitive markets but very few perfectly competitive markets so when we assume this in this chapter it is very much for instructive reasons for now though we'll look at supply and demand in perfectly competitive markets for two reasons first it's easier to learn understanding perfectly competitive markets makes it a lot easier to learn the more realistic but complicated analysis of imperfectly competitive markets secondly despite the lack of realism the perfectly competitive model can teach us a lot about how the world works and we'll see this many times in this chapter in other chapters that follow so let's talk about demand demand comes from the behavior of buyers now with in demand there's different variations here the quantity demanded of any good is the amount of good of the good that buyers are willing and able to purchase now the law of demand is the claim that the quantity demanded of a good Falls when the price of a good Rises other things being equal otherwise known as ceteris paribus other things being equal holding all other things constant demands a little easier for beginning economists to comprehend because we're all consumers we're all demanders if something becomes more expensive we're much more likely to want less of it if it becomes less expensive and it's something that we demand anyway we're gonna want more of it to illustrate this we use the demand schedule the demand schedule is a table that shows the relationship between the price of a good and the quantity demanded here's an example Helens demand for lattes notice that Helen Helens preferences obey the law of demand at a low price like free she demands more at a high price like 6 she demands as you can see as price increases the quantity of lattes demanded decreases it's an inverse relationship and with inverse relationships we typically graphically see a negative a downward curve so we're gonna put Helens demand schedule onto a graph on the Left vertical axis we have the price of lattes from zero to six dollars on the horizontal axis we have the quantity of lattes demanded zero to 15 and onwards we can plot the prices we have the prices here and their corresponding quantities at six dollars Helen wants four lattes at three dollars Helen wants ten lattes and so on and so forth you just make your dots there and then we put everybody's favorite game connect the dots and you have a demand curve so now we look at market demand versus individual demand hell is just one person there are more than just Helen in the market there's Helen there's Ken there's Chris there's Bob there's all these people the quantity demanded in the market is the sum of the quantities demanded by all buyers at each price so you take all these different people and you add up their quantity demanded at the different prices and you have your overall market demand now obviously Helen and Ken are gonna differ than the quantity that's it they won't add different prices suppose Helen and Ken are the only two buyers in the lot a market though 2d here is quantity demanded and we have our prices 0 1 so on and so forth all the way up to 6 we know Helens kwan demanded for the different prices but now we find out Ken's quantity demanded he likes a lot tastes too but it's about half as much as Helen does a quantity here so we take Helen and Ken again they're the only two buyers in this fictitious example and we add their coin demanded up so $0 market Quan demanded again the markets made up of Ken and Helen is 24 at six dollars it's six now this example violates the quote unquote many buyers condition of perfect competition yet we're merely here just trying to show that at each price the quantity man in the market is the sum of the quantity made by each buyer in the market this holds whether there's two buyers or two million buyers obviously it'd be a lot harder to illustrate two million buyers which is much more realistic but it would be harder to fit that data on the on the slide so we'll settle for two for now so now we look at the sum of the buyers of the market the consumer some the quantity demanded for the market and we plot it just like we did before six dollars at six dollars there's people the people want six and at one dollar they will twenty one and so on and so forth make you dots connect the points now there can be things that shift demand demand curve shifters the demand curve shows again demand curve shows how prices affect Quon demanded all other things being equal these other things are non-price determinants of demand for example things that determine buyers demand for a good and other than the goods price so it's not generally not price if you don't like a coffee's flavor that can affect your demand that can shift your demand if there's a positive health report that says caffeine and a latte helps you live longer that can affect your demand things like that so changes in those shift the demand curve now notice I said shift the demand curve a demand curve shifter can be the number of buyers an increase in the number of buyers increases quantity demanded at each price and shifts demand curve to the right income is the first demand shifter discussed in the chapter in this textbook it we we start with a different one number of buyers for the following reason so when you're in the reading they talk about income first in the slides here we're talking about the number of buyers first in discussing the impact changes in income on the demand curve the textbook also introduces the concept of normal Goods and inferior Goods you may find it easier to learn about the curve shifts if the presentation focuses solely on the shift at least initially without the simultaneous while simultaneously introducing the inferior Goods and normal Goods again here know the reason why I urge you to not only attend the lectures and watch the videos but also to do the reading because there's a bit of strategy here to expose you to different reasons while the demand curve shift so back to the number of buyers suppose the number of buyers increases then at each price quondam and will increase let's say by five in this example and let's say it goes uniformly by five that's not typical but being beginning economic stated see sometimes you often have trouble understanding the differences between movement along the curve and a shift of the curve here we're talking about a shift of the curve from an increased quantity of lattes purchased at each price so this is not movement up and down the curve this is movement of the curve the entire curve shifts right work so another demand curve shift or now we'll talk about income demand for a normal good is positively related to income an increase in income causes an increase in the quantity demand at each price the it's just the demand curve to the right there's an increase essentially a normal good is a good that you want more of as you get higher pay demand for an inferior good is negatively related to income an increase in income shifts and demand the demand curves for an inferior Goods to the left so as you earn more money this is a good that you won't less of classic examples top ramen noodles I'm pretty much sure that most college students on a budget are familiar with what a ramen noodle package is very inexpensive meal that you can throw it together and generally speaking as people get more resources they get more income they eat less top ramen noodle normal goods most goods are normal goods think electronics think steak dinners that type of thing as you get more income you generally consume more normal goods another demand curve shifter is the prices of related goods to goods are substitutes if an increase in the price of one causes an increase in the demand for another or for the other a good example is pizza and hamburgers an increase in the price of Pizza increases the demand for hamburgers shifting the hamburger demand curve to the right if you go down to a restaurant and they have pizza and hamburgers you generally don't consume both at the same time you pick pizza or hamburgers if pizza is really expensive you're more likely going to consume more hamburgers so the increase in the price of pizza affects the demand for hamburgers other examples are Coke and Pepsi they're seen as substitutes price of one went really high you just consume more the others laptops and desktop computers CDs and music downloads are another example although an aging example that would add if two goods are complements an increase in the price of one causes fall and the demand for others and a good example are computers of software the price of computers rise people buy fewer computers therefore they buy less software you wouldn't buy software if you didn't have a computer the software demand curve shifts to the left other examples are college tuition and textbooks if college tuition price goes through the roof less students will go to college and less people would buy textbooks bagels and cream cheese or complements eggs and bacon so on and so forth if the price of one goes down it'll affect the demand for the other if the price of one goes up it'll fit demand for the other as well now one of the more interesting demand curve shifters is tastes in the field of marketing there's a whole field called consumer behavior and it focuses a lot on consumer tastes anything that causes a shift in taste towards a good will increase the demand for that good and shift this demand curve to the right and it also could be a and taste that affects it negatively and shifted to the left the Atkins diet became popular in the 1990s it caused an increase in the demand for eggs because it really touted the benefits of an egg the protein all the good fats and it shifted the demand curve to the right so eggs got popular so the demand for eggs shifted to the right along the lines of consumer behaviors well another demand curve shifters expectations expectations affect consumers buying decisions examples include if people expect their incomes to rise their demand for meals at expensive restaurants may increase if the economy soars and people are excuse me the economy sours not soars if it's ours and people worry about their future job security the demand for new cars new automobiles may fall so if you expect to have more more money tomorrow you might spend you might spend some money today if you expect to have less money tomorrow might save some money today so in summary variables that influence buyers you have priced number of buyers income price of related good tastes and expectations price can cause a movement along the demand curve your demand curve doesn't shift you just move up and down the demand curve so a change in price causes the movement along the demand curve very important to distinction there number of buyers income price of related good-tasting expectations all those other things we were talking about in the earlier slides all shift the demand curve you should notice that the only determinant of kuan demanded that causes movement along the curve is price also notice price is one of the variables measured along with along the axes of the graph so here's a handy rule of thumb you can use to remember whether the curve shifts if they're variable causing the demand to change its measured on one of the axes you move along the curve okay if the variable that causes the demand to change does not appear on either the axes then the curve shifts so remember we had price on the vertical axis and quantity on horizontal axis if it's something other than price or quantity it's a shift in demand and on the movement along the demand curve this rule of thumb works with all curves in economics that involve an XY relationship including the supply curve the marginal cost curve the is and LM curves which is not covered in this book or this course but just for future reference as you move on and many others though it does not apply to curves drawn in time series graphs which is something we cover a little bit later so just keep that in mind so we can draw a demand curve for say music downloads as examples given in the book and what happens in each of the following scenarios and why the price of iPads Falls our iPod scuse me Falls so if the price changes that's something that's on the axis you know you're moving along the curve again the price of music downloads Falls and the price of CDs Falls so again we actually need to look at this in terms of not only looking at the demand curve for music downloads but we need to need to consider what iPods the download itself and CDs are so iPods and music downloads are complements so if the price of iPods fall there's real potential for the demand for music downloads increase more people will buy iPods if the price of music loads itself falls obviously something's less expensive consumers may want more of it so that can be an increase in demand or movement along the demand curve I should say so the first one if the price of iPods Falls we're talking about a complement here there's a potential shift in the demand curve the price of music downloads Falls we're talking about potential movement along the demand curve and then lastly the price of CDs fall CDs are substitutes for music downloads so if CDs become less expensive than say music downloads which is hard to imagine in this day and age the consumption the demand for music downloads may decrease now these are all in theory based on what we just went through in the previous slides let's see if we can illustrate it here the first example example a the price of iPods fall so on the left hand side you have here the price of music downloads and then the quantity of music downloads because again we're concerned with what's gonna happen easy downloads music downloads and iPods or complements a fall in the price of iPods shifts the demand curve for music downloads to the right I should point out that there are no numbers or units on either axis on the graph here we're using p1 and q1 to represent the initial price and quantity rather than specific numerical values this is common because much of economic analysis the goal is to see is only to see what direction that changes occur in and not the specific amounts besides if we put numbers on this graph they would just been made up anyway so why bother also the price of music downloads is the same but the quantity demanded is now higher so again in this example the price of iPods fell the price of music downloads didn't change but it's complement the iPod the player spell in fact this is an is the nature of a shift of a curve at any given price the quantity is different than before now looking our second example here the price of music downloads fall so again this is directly related to what we're what are good of interest is here the music downloads so again we have the price of music downloads on the vertical axis the quantity of music downloads on the horizontal axis the demand curve does not shift in this example remember this is something that's on an axis so it's a movement along the curve to a point with the lower price okay and at the lower price we have a higher quantity this is our original point our p1 q1 price dropped with new P here we have to find that on the demand curve we have a new corner q2 so what happens here p1 drops to p2 and correspondingly when something becomes less expensive well q1 moves to q2 there's an increase in quantity but again movement along the demand curve versus a shift of the demand curve third example price of CDs fall again we're looking at CD prices changing the price of music downloads is not changing but CDs and music downloads are substitutes a fall in the price of CD shifts the demand for music downloads to the left so again we have the quantity of music downloads here on the horizontal price of music downloads here because a complement became less expensive there's a shift in the demand curve price of music downloads didn't change but the quantity of music downloads did change due to the negative left shift of the demand curve for losing commitment for music downloads so now let's shift gears to supply the quantity supplied of any good is the amount that sellers are willing and able to sell the law of supply is the claim that the quantity supplied of goods Rises when the price of that good Rises all of the things being equal considers paribus so assuming all other things equal so supply comes from the behavior of sellers now for beginning economic students that haven't either worked in retail or owned their own businesses the supply side can be a little more challenging here we have to drop our mode of thinking as demanders as consumers that were much more used to doing and put ourselves into the shoes of someone selling something so your supplier so what do you want more of well you want a higher price to sell your goods and at a higher price you willing to sell more of your goods why because that's more revenue and more revenue means more profit so let's take a look at the supply schedule the supply schedule is a table that shows the relationship between the price of a good and the quantity supplied examples before we talk about Helen in her lattes now we're talking about Starbucks and their supply of lattes notice that Starbucks supply schedule obeys the law of supply at zero dollars they're willing to supply zero lattes at six dollars they're willing to supply 18 lattes again this is just a fictitious example using simple numbers so as you can see as the price of a lattes increases the willingness to supply lattes by Starbucks increases so there's a positive relationship and graphically in a positive relationship you're going to see an upward directing curve okay so again we have price on the left hand side quantity on there on the price on the vertical left hand and quantity on the right side here on the horizontal axis as price goes up quantity goes up and zero Starbucks is so near a lattes make no money at six dollars hey there saying hey let's let's apply 18 so you just plot these out and connect the dots we've been doing that since kindergarten all right so now looking at market supply versus individual supply just like we did with demand the quantity supplied in the market is the sum of the quantity supplied by all the sellers at each price just like it was from all the buyers at each price for demand suppose Starbucks and Peet's are the only two sellers in this market again an oversimplification is a clear violation of perfect competition saying there's only two sellers however it's much easier for you to learn how the market supply curve relates to individual sellers and the two seller case instead of trying to illustrate it say with 100 sellers and zero dollars Starbucks and Peet's nobody's willing to offer lattes at $1 you have Starbucks willing to do three and p22 that's a market quantity supplied again qss quantity supply to five so on and so forth all the way down to six dollars words 18 and 12 is 32 lattes on the market so we can plot this you can pause the relationship zero there zero at one dollar there's five at six dollars there's 30 so on and so forth so we just connect the dots you have a supply curve now the supply curve can shift as well the supply curve shows how price affects quantity supplied and all other things being equal again Latin word for that is ceteris paribus or you can see it abbreviate sometimes in other economics courses if you go on to take more these quote-unquote other things are non-price determinants of supply changes in them those other things shift the supply curve non-price determinants of supply simply mean the things other than the price of a good that determines the sellers supply of again so just like demand price changes can movement along the curve if we talk about the product they were interested in like lattes and then other things non-price determinants result in shifts of the curve so shifts versus moving along so supply curve shifters first we're going to look at his input prices now key word here is not just price but input prices examples of input prices or wages price in prices of raw materials so again your supplier your manufacturer your Builder your your something here that requires labour so you have to pay that labor wages and those wages are input cost okay and prices of raw materials you're gonna make a latte you need milk you need you need coffee you need all these other things those are raw materials they fall and input prices makes production more profitable at each output price so firms supply larger quantity at each price and exploits to the right so if they're making more money supplying something that the input prices this became a little more affordable they're willing to supply more of it now in the second bullet point the quote unquote output output excuse me in English output price just means that the price of the good that firms are producing and selling I've used output price here to distinguish from input prices so just so there's there's clear there so this is the price that chart that Starbucks charges output price and this is the price it pays to put together two lattes so again in this example let's say what the latte examples suppose the price of milk Falls and each price the quantity of latte supplied will increase by let's say uniformly five in this example so milks less expensive they're making more money per latte at five one dollar they used to the market or Starbucks would supply five now they're willing to supply 10 and so on and so forth you just have a shift in supply a positive shift in supply the opposite could be true as well if input prices go up if milk became more expensive they're making less money this curve could shift to the left and to be less willing to supply say lattes at $1 there'll be a lower quantity another supply curve shifters technology technology determines how much inputs are required to produce a unit of output technology can make things more efficient you can make more goods with less inputs which cuts down to your costs or the opposite can be true a cost-saving technological improvement has the same effect as a fall and input prices so if you're if you're saving money through technology your cost per unit of output that you're you say we have some new machine it makes the lattes with less milk that causes Starbucks to have to use less milk which lowers their costs and can't shift the supply curve to the right because again the inputs then lower and they're willing to supply more at a lower price another potential supply curve shifter is the number of sellers again an increase in the number of sellers increases the quantity splott of each price so on the S curve the supply curve shifts to the right this is commonly seen in competition if more restaurants occupy a corner there's more competition there's more hamburgers and pizza or whatever being sold so sellers see a need to try to compete with their their other folks and that can that can lower prices that can provide more supply but basically what you need to know from this slide is this there's if there's more supply something's more available like through the increase of a number of sellers the quantity supplied at each price increases and that that affects competition another supply curve shifters expectations a good example is events in the Middle East lead to expectations of higher oil prices in response owners of of Texas oil fields reduce supply now and say some inventory to sell later at a higher price so the supply curve decreases it shifts to the left all these are expectations I think we've all seen oh man there's something going on the Middle East gasoline is gonna become more expensive because oil is gonna go up let's all run down to the local store and fill up our cars which actually is an increase in demand which increases prices even more but we'll get there later the Texas oilman might say wow that's really gonna drive a price let me hold some back and I can sell the oil that would go at $50 a barrel today for $70 a barrel tomorrow so let let me hold off and get a higher price tomorrow so that's all speculation and expectations in this example the supply curve shifts to the left in general sellers may adjust supply when their expectations of future prices change if the good is not perishable if it's not something that has to go to market immediately if it's something that can be stored like grain or oil if a seller says man it's gonna be $20 more a barrel tomorrow or $20 more bushel tomorrow I'm gonna wait and sell my goods tomorrow all those are expectations so summary other variables that influence sellers and suppliers here you have price input prices technology number of sellers and expectations again price of the good causes that change in that variable causes movement along this plot curve whereas input prices the cost of the raw inputs you put in the technology and the number of sellers and expectations can all cause shifts of the supply curves curve inward or outward so let's work through an example we can draw a supply curve for let's say tax return preparation software what happens to it in each of the following scenarios let's say retailers cut the price of the software okay that's a price affecting the direct supply of software the second example we're going to work through is a technological advance that allows the software to be produce lower cost and the third example we're going to work through is a professional tax return preparers raise the price of services they provide now just to be clear a tax return preparation software it means programs like turbo tax by quicken or tax cut by H&R Block or an online service that you use to do your taxes versus using say an accountant so let's take a look at the first example a fall in the price of a tax return software so again tax return software is what we're concerned with here primarily it's something that's on axis it's on this vertical axis here price of vertex return software and the vs. the quantity of tax return software the supply curve does not shift we just moved along the supply curve to a lower P and a lower Q so again you're the seller supplier of tax return software here your price originally here price one and quantity one if the price goes down as a seller you get not a consumer as a seller are you gonna be willing to provide more or less of your tax return software well the price is lower you look at your supply curve the quantity is gonna go down cuz it'll lower price you're making less money so you're willing to give up less of your good so you shift from q1 to q2 now the second example is a fall and the cost of producing software okay so your producer software you're gonna supply our tax return software you have your price here on the Left price doesn't change we're talking on a fall and cost so how does that affect the quantity of tax return software and is that a shift along the demand curve or a shift of the demand curve well again this is the cost it's not something that appears on axes this is not something that's a movement along the supply curve it's just shift in supply curve but which direction well it's a fall your costs you're making more money per unit of software because your cost went down thus you supply curve shifts to the right and at each price that the price at that price in this example each price no matter what they are there's a higher supply the quantity supplied increases so you have a shift in supply curve so that's the first thing you need to be able to recognize not a movement along the supply curve and you have an increase in quantity even from q1 to q2 price didn't change cost change the third example professional prepares raise their price say it's an accountant CPA they're gonna raise their price for what they charge for doing your taxes so as a supplier of tax software tax return software what does this do this shifts the demand curve for tax preparation software not the supply curve so this is a bit of a trick question so this still there okay you didn't affect your price at all didn't affect your input cost at all your price is the saying your input costs are the same but again you're a price that you're a tax returns all for a supplier this is your competition your substitute okay remember we talked about substitutes just moments ago we were talking about demand when the price of pizza went up what happened to the demand for hamburgers the demand increases this is not a supply issue so you have to really think through this this is again when your competition your substitute raise their price this shifts the demand curve for tax preparation software not the supply curve now let's put these two crazy kids together you hear people say all the time hey it's just supply and demand well here it is your just supply and demand we have price and we have quantities I believe judging by these prices here we now return to the lot a example to illustrate the concepts of equilibrium we're also going to take a look at shortages in surplus so equilibrium is where price has reached a level where the quantity supplied equals the quantity demanded it's literally where they cross on the graph so here in this lot a market here's your supply here's your demand the equilibrium appears to fall at three dollars and fifty not a sequel Librium price is the price that equates to the quantity supplied with the kuan demanded it's where the people who want lattes meet the people who sell the lattes so lattes go for three dollars and there are 15 sold and this is an oversimplified example equilibrium quantity is the quantity supplied naquan demanded the equilibrium price so again equilibrium you can go in two directions in the graph you get the left and see three dollars the equilibrium price and you can see 15 is the equilibrium quantity very simple but again in the table format here they all are laid out the quantity minute for the market coin supplied for the market we can use the graph to determine hey where does supply equal demand and we get the quantity supplied and the quantity made now let's take a look an example of a surplus otherwise known as excess supply when the quantity supplied is greater than the quantity demanded in this example we know now this will be equilibrium maybe 3.15 but for some reason the price is $5 we'll get into it why this can occur much more further down the line but I want to get you the basics here Weser is let's say for some reason the price is $5 okay we know the market equilibrium price would have been three dollars so what does the consumer feel like well you know I should be paying three and I'm having to pay five I'm just gonna buy less lattes so then the quantity demanded is nine right here where that price crosses that demand curve now was a supplier saying man I'm supposed to be paid three and I'm getting five I'm gonna sell more so we look at where that price lands on their supply schedule again this is that's at that table this is the illustration of that table and it says hey and five I'm gonna be willing to offer twenty five lattes well what's the problem here people only want to consume nine lattes well they want to supply 25 lattes when you have more lattes than you need it's called a surplus so this results in a surplus of 16 lattes again excess supply surplus is when quantity supplied is greater than coin demanded facing a surplus sellers try to increase sales by cutting prices mr. Starbucks and mr. Pete's looks around and since me I got all this extra inputs I got all these extra latte sitting around how in the world am I gonna get rid of them I have a surplus well this causes so what do they do they have a sale they cut prices and say come in here we're gonna have a sale we get way too many these lattes you see a lot of us with car dealers there's a lot of shady stuff that goes on there we'll cover later but we have too many of the 2014 models come in and get them before the 2015's get here and so on and so forth except for here we're talking about latte so there's extra lattes the suppliers cut price to try to get rid of them this causes the quantity demand to rise okay it's kind of counterintuitive but at a lower price member this is showing the price goes down quantity rises inquiries supply to fall which reduces the surplus so we're moving towards equilibrium here both of us demanders and suppliers right however we still have a surplus here at four dollars because you know the markets still saying hey it's supposed to be three and fifteen all right we still have a surplus of mmm looks like twelve is the quantum ANDed and twenty is the quantity supplied so 20 minus twelve year surplus of eight okay price continues to fall until the market reaches equilibrium okay they went from five dollars down to four dollars man now we still have a surplus of aid at four dollars let's see if we cut pressing him what will happen and we sell into our equilibrium price continues fall again until the market reaches equilibrium and everybody's happy because we're an equilibrium coin demand equals coin supplied price ticks at three dollars and the quantity sticks at fifteen so let's look at the opposite shortage in other words excess demand when the quantity demanded is greater than the quantity supplied again there's a lot of backstory as to why this can happen for now we just want to keep it simple and say what if in this example the price of a latte was one dollar well if the price is a lot of a lattes one dollar and you like lattes you're gonna demand more lattes because it's inexpensive coin demanded will be twenty one lattes at one dollar and the quantity supplied because you're mister Starbucks you don't want to give away your lattes for one dollar is only five remember our supply schedule our demand schedule a lower price people demand more and a higher higher price they demand less and a lower quantity supplied their sellers gonna sell more at a higher price you can sell or they're just excuse me a lower price the seller is gonna sell less and higher price they're gonna sell more okay graphically you know when you try to explain all this it can be quite cumbersome there's a lot of words being thrown out on this lecture however when you look at the graph it's very simple hey at $1 suppliers are gonna be here in demanders are gonna be here that's the beautiful thing about models in economics well when the quantity demanded because the price is so low is so high 21 lot days and the quantity supplied is so low because the price is so low as a seller you know what to sell many you have people wanting 21 lattes and Starbucks and Peet's only supplying five alright this results in a shortage of 16 lattes that's the shortage the distance from here to here is a shortage okay quantity demanded exceeds quantity supplied shortage so again facing a shortage sellers raise the price again for some reason artificially the price was at $1 and one dollar for a latte excuse me and facing a shortage there's these people that won't there a lot they want lattes there's a great demand for it but there's a unwillingness to sell it at that low price so what happens no there's a great demand let's raise prices and try to sell them and see what happens so first we go up to $2 this calls quantity demanded to fall cuz again it's more expensive people want less just remember back to the demand schedule and the quantity supplied to rise making more money you're willing to sell more as a as a supplier this reduces the shortage however there is still a shortage as illustrated here in the gap here between the two points on the graph now price continues to rise until they reach market equilibrium okay we get back to that point where Kwan demand equals quantity supplied three dollars for a latte and you're gonna sell 15 lattes and the market is in equilibrium so no matter whether you end up in a shortage or a surplus the market forces are going to try to move towards the equilibrium so three steps to analyzing changes in equilibrium to determine the effects of any event this um you can there's three steps you can decide whether to the events shift the supply curve demand curve or both step one requires knowing all the things that can shift demand and supply like the non-price determinants of demand and supply so that can get a little convoluted but by the end of this course you'll be very good at it the second step is decide in which direction the curve shifts is it a positive is it a negative for supply and demand are they opposite and then third use supply or demand diagram use the supply and demand diagram or them individually to see how the shifts changes in equilibrium for the price of quantity you'll see a lot of this both in your homework you'll get to practice these three things and then also on your test you're probably gonna have some scratch paper where you just sit there and draw it out and say hey what would this do and it really helps you if you take the time to perfect the graphs in this chapter it will really lay the tracks for success moving forward not only in the homeworks but also the tests and just in economics in general so it's a very important chapter I can't stress that enough so let's work through an example here markets are the market for hybrid cars a little excuse me on the vertical axis here we have the price of hybrid cars on the horizontal axis we have the quantity of hybrid cars we have the supply schedule the demand schedule here in supply curve demand curve and we have our equilibrium price on our equilibrium quantity at least our original price and quantity let's say there's a shift in demand in the event that causes a shift in demands the increase in the price of gas well we all know cars run on gas and hybrids use less gas so step one we know the demand curve shifts step two which way well we're talking about the cost of something that's an input to the car that uses less of it versus cars that use more of it so it's kind of a substitute the hybrid is a substitute for gas guzzlers so the demands going to shift to the right we move from d1 to d2 the read demand curve well what does this do this shift causes an increase in the price and quantity of hybrid cars and this was our original s1 and s2 for hybrid cars the price was here hybrid cars block of better would become more popular because they they consume less gas and gas has increased in price so what happens to hybrid cars people want more of them q1 to q2 and when they want more of them the price increases they become more in demand so supply didn't change demand it so here's your new price and your new quantity more hybrids are wanted at a higher price now notice when price rises producers supply a larger quantity of hybrids even though the supply curve has not shifted its movement along the supply curve here why so yeah the price member of remember for hybrids went up okay so that's a shift along the supply curve and then the shift of the demand curve increased quantity so always be careful to distinguish between its shift in the curve and movement along the curve we had shift of the demand curve and movement along the supply curve here now terms for shift versus movement along the curve a change in supply now this is where the language becomes important early on I like to tell my economic students that economics is widely feared because it's it's made more complicated than it should be in a lot of areas economics is something you do every day something you observe every day much of it is just learning the lingo learning the languages much of it's just learning what things are called that you've observed before so the terms for a shift versus movements along the curve are as follows a change in supply is a shift in the supply curve that occurs when a non-price determinants of supply changes say like technology or input costs a change in the quantity supplied is movement along a fixed supply curve that occurs when price changes that's on the axis of change in quantity supplied so we have a shift of the curve versus a movement along the curve change in demand is a shift of the demand curve that occurs when non-price determinants of demand change things like income and the number of buyers in the market begin a shift of the curve that's a change in demand change in quantity demanded is a movement along the fixed demand curve that occurs when price changes so rumor you're gonna move up and down the supply supply or demand curve when price changes and when it's something else everything else changes you haven't change in demand or supply and that's gonna be a shift of the curve can be very convoluted for you at first but please please please take time except that we listen to what we're saying on these slides please do it if you're gonna do one of these videos twice it's this chapter that you should do if you're gonna read a chapter twice it should be this text chapter and chapter that you read twice again supply refers to the position of the supply curve while quantity supplied refers to the specific amount that producers are willing and able to sell similarly demand refers to the position of the demand curve while quantity demanded refers to the specific amount that consumers are willing and able to buy so let's look at a second example here shift in supply what causes a new technology reduces the cost of producing hybrid cars so again reduces those input costs so what is the hybrid car producer getting out of this well it's less expensive for them to produce cars means they're making more money so at the same prices they're willing to supply more product and in this case if it shows enough price can actually decrease the supply curve shifts to the right because again they're willing to supply more because they're making more per car making more money per car because the cost went down that is so the supply curve shifts to the right we get from s1 to s2 and the shift causes a price that causes the price of hyper crust to fall and the quantity to rise well because there are more cars on the market it's hybrid cars are more widely available there's more competition for a whole host of reasons the price falls so price goes from p1 and q1 down to p2 so a decrease in price there are more cars available at a lower price supply increased a shift in both supply and demand curve now here's where things get a little convoluted it's all right remain calm no big deal let's say the prices of gas Rises and new technology reduces production costs this is gonna call book calls both curves to shift were essentially combining our two examples we just went through both shift to the right okay well first of all let's take the price of gas rises we know that's a demand issue here we've moved from d1 to d2 because why well price of gas goes up do you want to own a gas guzzling or or do you want to own a hybrid that uses less gas and again gas is the thing that's going on well you want to use more you want to demand more hybrid cars so the demand shifts okay we know that shifts right that was our first example meant through now your supplier switch it up new technology reduces your production cost means you're making more money per car it's less expensive to make them so you're gonna supply more of something that you're making more money on so both shift to the right go from s1 to s2 the new equilibrium in this simultaneous shift here that's what we're considering it is a simultaneous shift if it was not simultaneous say the gas prices rose you know the first year you would have an equilibrium here and then the second year cost of technology went down you'd have a shifted supply here so it can happen over time but what we're assuming in this example is that it was simultaneous that both the price of gas rose and the new technology reduce production costs so we had a new supply curve and a new demand curve and a new equilibrium so what happened here well the quantity rises there's more cars being produced and the demand for those cars increased as well the effect on price is ambiguous because it's a simultaneous change we don't fully know what's gonna happen the price here it appears the way we graph this that price went up that is because we see this gap here the demand increased more than the supply if you see the gap between s1 and s2 this is whole corridor here and then you see the the corridor between demand 1 and demand 2 it looks like the change in demand was larger than the change in supply it could be quite possible if these gaps were the same the difference between demands and the difference between supplies that price could appear to have stayed the same or going up marginally or even possibly going down largely it all depends on how you draw the graphs so we considered ambiguous if we know for a fact that demand increased more than supply we and confidently say that price increased okay but if we don't know what the difference was if I just said hey supply increase in demand increase not it and give you graphically the differences here you can't tell me where the price went up down or stayed the same so keep that in mind but we do know quantity increased we know that for sure so on the other hand let's say again the price of gas rises in new technology reduces production costs step3 continued see the gap here between supply 1 and supply 2 in the gap here between demand 1 and demand - what's wider now the supply is wider so if the supply increases more than demand price Falls so you can see here price went down price 2 is below price 1 okay so a lot depends on this gap here if I don't tell you what how far if I don't tell you that hey the increased in supply was larger than the increase in demand then you can't tell me what happened with price if I tell you that supply greatly outpaced the increase in supply greatly outpaced the increase in demand you can tell me ok price went down so keep that in mind again if you can master these graphs and if you can carefully read through like things on the tests and the homework and say hey you said supply increase more than demand here they're both increasing concurrently they're both increasing together why they're both changing together and I know that one moves more than the other you'll know how to graph it and if you can graph it piece of scratch paper and cocktail napkin whatever if you take the time to learn this chapter inside and out you know how to graph supply and demand and changes in supply and demand and movements along the curve I will have a very hard time trying to fool you over the next few weeks of this semester but again it's all in the preparation so again conclusion how prices allocate resources one of the 10 principles covered in chapter one of this textbook is that markets are usually a good way to organize economic activity in market economies prices adjust a balanced supply and demand these equilibrium prices are signals that guide economic decisions of buyers and sellers and thereby allocate scarce resources again those scarce resources are time or money or inputs whatever we have we have limits on them in the textbook the conclusion of this chapter offers some very nice elaboration on the second bullet point so I would highly recommend you take a look at that again the reading is paramount in this course so in summary a competitive market has many buyers and sellers each of whom has little or no influence on the market price economists used the supply and demand model to analyze competitive markets the downward sloping demand curve reflects the log demand which states that the quantity buyers demand of a good depends negatively on the goods price so it is less expensive you're going to want more of it as a demand er besides price demand depends on buyers incomes taste expectations the price of substitutes and complements and number of buyers if one of these factors changes the demand curve shifts these are those other factors outside of price you're gonna need to know all of them buyers income tastes expectations price of substitutes complements and number of buyers the upward sloping supply curve reflects the law of supply which states that the quantity supply sellers supply depends positively on the goods price other determines of supplying could include input prices that's the input cost technology expectations the number of sellers you need to know there's as well changes in these factors shift the supply curve so again as a supplier you're making more money you're gonna want to supply more if you're making less you're gonna want to follow less and their movements along the supply curve related to price and the movements of the supply curve related to input prices which is your cost of production technology expectations and number of sellers the intersection of the supply and demand curves determined the market equilibrium at the equilibrium price the quantity supplied equals the quantity demanded if the market price is in equilibrium or excuse me if the market price is above equilibrium a surplus results which causes the prices to fall if a market price is below the equilibrium a shortage results causing the price to rise you know the difference is between the quantity supply and the quantity demanded a surplus and then also in a shortage we can use the supply and demand diagram to analyze the effects of any event on a market first determine whether the events have one or both curves first determine whether the event shifts one or both of the curves second determine the direction of the shifts and third compare the new key Librium to the initial ones that you can make some insights as to what happen to price and quantity in market economies prices are the signals that guide economic decisions and allocate scarce resources so prices are huge obviously for both suppliers and demanders again this concludes chapter 4 the market forces of supply and demand again this is the most important chapter in the textbook please take some extra time to master this chapter it'll make it much easier for you to learn and Excel moving forward through this book and through this course as always if you have any questions feel free to reach out to me during office hours or send me a message any time by email thank you so much for listening to this lecture and again please that stress chapter 4 is very very important for your success on this course thank you

Channel: Jonathan Keisler, PhD

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Id: wJBk6hG6TD8

Length: 63min 58sec (3838 seconds)

Published: Fri Aug 14 2015