Lecture 5 – Supply and Demand

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“U003e all right well we ve talked nabout supply and we ve talked about demand demand separately. But we know that in the real nworld supply and demand kind of together so nwhat. We need to do now is to start talking nabout. What happens when we put them together the graphs for them nstay the same supply is still an nincreasing function demand is still a decreasing nfunction.

It s just that now when you put them together nit starts to make sense before we were talking nabout this quantity supply quantity demand change in nsupply change in demand basically what we re trying nto do is to get to this. Though because what we have right nhere is supply and demand in the same graph and the nintersection here that s known as equilibrium right equilibrium. Is where supply nand demand are the same and the price that s at nequilibrium. I ll often write p with a subscript e to denote nequilibrium.

This is the price that would keep supply and ndemand constant right. So you would supply nthe same amount that everyone else would demand so in other words. There wouldn t be nchanges in inventory. People wouldn t have to nbe worried about selling out of something or having na warehouse get too full of leftover goods that they nhadn t sold yet and if you want to know what the quantity nthat you would produce at equilibrium you just ntake that point and drop it down to your quantity curve now.

This is equilibrium. Well. If inaudible were set this is where we would nsit all the time right. Unfortunately.

That s not nhappening in the real world. What s happening is that supply nand demand are shifting all over the time because n. Inaudible isn t being held. So what we have are nnon priced determinant changes.

It s your job as a student to ntell me or the general public as a whole what happens when you nstart changing certain factors in a market so in other words let s ngo back to the corn market. I love the corn market it s nmy favorite so let s assume that something changes a nnon price determinant changes in corn. And let s suppose that what happens is we nincrease the number of sellers or we increase. The number nof people who grow corn.

So let s suppose that all of a nsudden they create a new type of corn seed that ncan grow in snow..

So now instead of only being nable to grow in the summer. All of those midwestern states where neverybody just sort of hangs out in the snow and nfreezes to death instead they ll start growing corn all right so increase the number of npeople that are selling corn or at least the number of ntimes you can sell corn what happens. When you nincrease the number of sellers well this is one of those nnon price determinants for supply. The number nof sellers is increasing so supply increases.

The supply ncurve moves to the right here is our new supply ncurve with the dashed line. Now you probably can see nright away. What should happen. The question is how ndo we get there what we do is move to nour new equilibrium.

How do we get there does it just happen nautomatically is it some magic noccurs and we get there no what happens is that initially the supply nincreases others we ll start growing corn in the nwinter and we ll have that extra corn hanging out. What will happen initially is nthat the price doesn t change the price actually stays fixed nat. The old equilibrium value. But what happens at this old nprice for demand and supply well what happens is that nwe keep demanding this amount of goods.

But at that price this nis. How much we want to supply. So what happens is nthat our supply all of a sudden is greater nthan our demand. What happens when supply nis greater than demand surplus surplus.

This we have a surplus of corn. So basically the graineries are ngetting all of this corn stuffed in at this price. And we re like noh crap. We can t sell all of this corn.

What nare we going to do well what happens when nyou have a surplus. What happens when you have stuff nhanging on the racks forever and ever and ever nat. A regular store sales basically what nends up happening. Is that when you have surpluses the nprice starts to decrease okay and what happens is that the nprice decreases along the demand curve until it gets down to nits new equilibrium point.

And when it gets to the new nequilibrium point..

The price this new equilibrium nprice that you ve created will stop the growth. Stop nthe surplus stop the growth in your inventory. Nit s getting bigger. So it s a multi step process so the first thing that nhappens is that supply increases and parentheses.

I ll nsay shift to the right the supply will shift nalmost instantaneously. I mean what s how nit works right of a sudden the corn nhits the market bam. The prices don t nchange right away they re still pretty nquick all right. But for a little while nwe ll have this surplus and since you have a surplus.

What ends up next nis price falls. What happens when the nprice of a good falls. Don t say that demand increases that s the wrong thing to say when demand increases then nthe demand curve is shifting no that s not what s happening. All is that is happening nis.

The price falls and when the price changes the nquantity demanded the increases until we get to our new nequilibrium point. Where supply and demand are the same again that s how price changes nwork. And how shift in supply. And demand.

Eventually. Lead. Nto. New equilibrium.

Prices and new equilibrium. Nquantities right. Notice that we re going nto be selling more corn. When we have more suppliers of course.

They ll be nselling..

It at a lower price. That s example. Number one let s take a look. Nat.

Another. One so let s allow something nelse to change this time. So. We ve done one in supply nlet s try one in demand.

And let s try a relatively neasy one so let s say that the opposite nside 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 ndemand. We re still dealing with our pricing npoint of the year and this would be our nequilibrium price when the number of nbuyers increases. Buyers that s demand.

This is a nnon price determinant of demand therefore our first nstep 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 ndoes. N t change. We re going to be sitting nat. Our old equilibrium price and our old equilibrium.

Price. Nthis is how much we ll supply. This is how much we ll demand demand is greater than supply. What happens.

When demand nis greater than supply shortage so in this case if nit s corn. The number of people who are buying corn goes up nthen we start having a shortage so the grainery start to lose nall their corn. There s nothing in their storage vents and nthey. Start.

Going uh..

Oh. This is a problem. What happens. When you nstart having a shortage.

Well you increase the price whenever you start running nout of things in order to make sure you don t run out of them again you raise nthe price a little bit. And again. The price rises nalong. The supply curve.

The price is being ndriven up by the suppliers. Because these demand people are nkeeping. We want it we want it we want it give us more nand they re like well if you want more i can t nproduce more right away. So i m just going nto raise the price now after the price goes up.

What do the suppliers. Nstart doing now you re getting nthe. Hang of it right increase in quantity supplied again don t tell me nthat the supply increases because if you tell me nthe supply increases then i think the supply curve nhas grown and that s not true the supply curve has not grown. All we ve done is risen.

The nprice. The price has gone up and so people are going to nproduce more if they can so the quantity supplied nwill go up until again we get to our new nequilibrium point all right so there s nyour first step. I think the next video will be ntrying to work with a couple of the more complicated nnon price determinants. ” .


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