Lecture 5 - Supply and Demand

Uploaded by OnlineEcon on 08.02.2010

>> All right well we've talked about supply and we've talked
about demand separately,
but we know that in the real world supply and demand kind
of happen together so what we need to do now is
to start talking about what happens
when we put them together.
The graphs for them stay the same.
Supply is still an increasing function;
demand is still a decreasing function it's just that now
when you put them together it starts to make sense.
Before we were talking about this quantity supply,
quantity demand, change in supply, change in demand.
Basically what we're trying to do is to get to this though
because what we have right here is supply and demand
in the same graph and the intersection here that's known
as equilibrium, right?
Equilibrium is where supply and demand are the same
and the price that's at equilibrium, I'll often write p
with a subscript e to denote equilibrium, this is the price
that would keep supply and demand constant, right?
So you would supply the same amount
that everyone else would demand.
So in other words,
there wouldn't be changes in inventory.
People wouldn't have to be worried about selling
out of something or having a warehouse get too full
of leftover goods that they hadn't sold yet, and if you want
to know what the quantity that you would produce
at equilibrium you just take that point and drop it
down to your quantity curve.
Now, this is equilibrium.
Well, if [inaudible] were set,
this is where we would sit all the time, right?
Unfortunately, that's not happening in the real world.
What's happening is that supply and demand are shifting all
over the time because [inaudible] isn't being held.
So what we have are non-priced determinant changes.
It's your job as a student to tell me or the general public
as a whole what happens when you start changing certain factors
in a market.
So, in other words, let's go back to the corn market,
I love the corn market, it's my favorite, so let's assume
that something changes, a non-price determinant changes
in corn and let's suppose
that what happens is we increase the number of sellers
or we increase the number of people who grow corn.
So let's suppose that all of a sudden they create a new type
of corn seed that can grow in snow.
So, now instead of only being able to grow in the summer all
of those Midwestern States where everybody just sort of hangs
out in the snow and freezes to death, instead,
they'll start growing corn.
All right?
So increase the number of people that are selling corn
or at least the number of times you can sell corn.
What happens when you increase the number of sellers?
Well, this is one of those non-price determinants
for supply, the number of sellers is increasing
so supply increases, the supply curve moves to the right.
Here is our new supply curve with the dashed line.
Now, you probably can see right away what should happen.
The question is how do we get there?
What we do is move to our new equilibrium.
How do we get there?
Does it just happen automatically?
Is it some magic occurs and we get there?
No. What happens is
that initially the supply increases others we'll start
growing corn in the winter and we'll have
that extra corn hanging out.
What will happen initially is that the price doesn't change.
The price actually stays fixed at the old equilibrium value,
but what happens at this old price for demand and supply?
Well, what happens is that we keep demanding this amount
of goods, but at that price this is how much we want to supply.
So what happens is that our supply all
of a sudden is greater than our demand.
What happens when supply is greater than demand?
Surplus, surplus.
This we have a surplus of corn.
So basically the graineries are getting all of this corn stuffed
in at this price and we're like oh, crap, we can't sell all
of this corn what are we going to do?
Well, what happens when you have a surplus?
What happens when you have stuff hanging on the racks forever
and ever and ever at a regular store?
Sales. Basically what ends up happening is
that when you have surpluses the price starts to decrease, okay?
And what happens is that the price decreases along the demand
curve until it gets down to its new equilibrium point
and when it gets to the new equilibrium point the price,
this new equilibrium price that you've created,
will stop the growth, stop the surplus, stop the growth
in your inventory it's getting bigger.
So it's a multi-step process.
So the first thing that happens is that supply increases
and parentheses I'll say shift to the right.
The supply will shift almost instantaneously.
I mean what's how it works, right?
Of a sudden the corn hits the market, bam.
The prices don't change right away.
They're still pretty quick, all right?
But for a little while we'll have this surplus
and since you have a surplus,
what ends up next is price falls.
What happens when the price of a good falls?
Don't say that demand increases.
That's the wrong thing to say.
When demand increases, then the demand curve is shifting.
No, that's not what's happening.
All is that is happening is the price falls
and when the price changes the quantity demanded the increases
until we get to our new equilibrium point where supply
and demand are the same again.
That's how price changes work and how shift in supply
and demand eventually lead to new equilibrium prices
and new equilibrium quantities, right?
Notice that we're going to be selling more corn
when we have more suppliers
of course they'll be selling it at a lower price.
That's example number one.
Let's take a look at another one.
So let's allow something else to change this time.
So we've done one in supply let's try one in demand
and let's try a relatively easy one.
So let's say that the opposite side of the coin happens.
The number of buyers increases.
What's going to happen now?
Well, things haven't changed.
We still have supply and demand, we're still dealing
with our pricing point of the year
and this would be our equilibrium price.
When the number of buyers increases, buyers,
that's demand, this is a non-price determinant of demand;
therefore, our first step is demand increases.
When does an increase happen?
Shift to the right.
So demand shifts to the right.
Move the whole curve.
Now what happens?
Our price, again, doesn't change.
We're going to be sitting at our old equilibrium price
and our old equilibrium price this is how much we'll supply,
this is how much we'll demand.
Demand is greater than supply.
What happens when demand is greater than supply?
Shortage. So in this case if it's corn the number of people
who are buying corn goes up then we start having a shortage
so the grainery start to lose all their corn; there's nothing
in their storage vents and they start going uh-oh,
this is a problem.
What happens when you start having a shortage?
Well, you increase the price.
Whenever you start running out of things in order
to make sure you don't run
out of them again you raise the price a little bit
and again the price rises along the supply curve.
The price is being driven up by the suppliers
because these demand people are keeping we want it, we want it,
we want it, give us more, and they're like, well,
if you want more, I can't produce more right away
so I'm just going to raise the price.
Now, after the price goes
up what do the suppliers start doing?
Now, you're getting the hang of it, right?
Increase in quantity supplied.
Again, don't tell me that the supply increases
because if you tell me the supply increases,
then I think the supply curve has grown and that's not true.
The supply curve has not grown.
All we've done is risen the price, the price has gone up
and so people are going to produce more if they can.
So, the quantity supplied will go up until, again,
we get to our new equilibrium point.
All right so there's your first step.
I think the next video will be trying to work with a couple
of the more complicated non-price determinants
for supply and demand, but this is a good start to get us going.