Demand and Supply Explained - Video 1
Transcript
Hey! How are you doing Econ students? This is Mr. Clifford welcome to AC/DC Econ. Right now we are going to talk about demand, and since demand has to do with buyers and consumers, I'm going to explain it all consuming this gallon of milk.
So, here we go, let's start it out. That first taste of milk is just wonderful, right? cold, refreshing. The first thing you have to understand about demand is the law of demand which says that there is an inverse relationship between price and quantity demand that means when the price goes down, the quantity demanded increases. And if the price goes down, the quantity demanded goes up again. So, take a look at his demand schedule. As you can see, when the price goes down, the quantity demanded goes up, when the price goes down to four, three, two, and one, the quantity demanded increases. Now when you plot these points, you are going to get a demand curve, which looks like this. It is a downward sloping curve showing the law of demand. Now there are three reasons why the demand curve is downwards sloping. It is the reason for the law of demand, it's the substitution effect, the income effect, and the law of diminishing marginal utility.
Substitution effect says - price goes down for milk, people are going to buy more milk, because they are going to move away from other products that are now more relatively expensive. So, instead of buying juice, people are going to turn around and go buy more milk. Now that goes the other way, when the price goes up for milk the quality demand for milk is going to decrease because people are going to move away from the milk and go find a different substitute product. I wish I could find a substitute product.
Now the income effect says that when the price goes down, people buy more milk because their purchasing power has increased. So if you go to the store, and you find out that milk is on sale and it only costs one dollar for a gallon of milk, you are going to buy more because you can buy more. The amount you can buy with each dollar has increased, and of course it goes the other way. If the price goes up for milk, people are going to stop buying milk, because their purchasing power has decreased. Each dollar gets them less milk.
And the third reason for the law of demand is something called the law of diminishing marginal utility. Remember utility is satisfaction and marginal is additional. So this is the law of decreasing additional satisfaction. The law says, as you consume anything, like milk, the additional satisfaction you are going to get is going to start to eventually decrease, which is exactly what is going on right here. That very first sip was super refreshing, but that last one not so much. Now this law applies to somebody drinking sips of milk, but it also applies to purchasing gallons of milk, that very first gallon of milk you get for your family, is awesome because it gives you a lot of satisfaction. You can can have your milk and cookies, you can eat your cereal. Your second gallon of milk gives you some utility and the third gives you some utility, but the law says, eventually, each additional gallon of milk that you consume is going to give you less and less additional utility. This concept explains the law of demand, and the shape of the demand curve because they get people to buy more quantity of milk, the price has to go lower because they get less and less additional satisfaction from each gallon of milk. It is getting warm, it is getting warm. So a change in price goes along the demand curve but if something else other than price changes it will actually shift the demand. For example, let's say a study comes out that says milk causes baldness, that would cause the entire demand curve to shift left. At every single price people are going to buy less and so the curve shifts to the left, that is called a decrease in demand, the opposite is an increase in demand, and so at every single price people want to buy more. So the demand curve shifts to the right.
Now there are five shifters, or determinants of demand. These are the things that cause the demand curve to shift.
The first shiftier of demand is state and preferences. For example, what if a new study comes out that says if kids have milk in the morning before going to school, do better at school and they are smarter? Well, that would increase the demand, the demand curve would shift to the right.
Another shifter would be the number of consumers. All of a sudden new customers come into town, that is going to increase the demand for milk.
Another shifter is the price of related goods, substitutes and complements. For example, almond milk and cow's milk are substitutes for each other. That is a bad idea. So if the price goes up for almond milk, and it is more expensive to buy this then the demands are going to increase for cows. If the price goes down for almond milk that means people are going to move away from buying cows milk and buy more almond milk. So the demand for cows milk will fall, of course there are also complements. So when price of cereal falls, is going to increase the demand for milk.
Now the next shifter is income. Income is a little tricky because it depends on the type of product. There's normal goods and inferior goods. So let's say that milk was a normal good. This means when there's an increase in come the demands are going to increase. When there is a decrease in income the demands are going to decrease. An inferior good is just the opposite, when there is an increase in comes the demand falls, and when there is a decrease in incomes the demand will go up. So whenever you see a question that involves income make sure to read the question carefully to find out if it is a normal good or an inferior good.
The last shifter of demand is a change in expectations. So for example, if you think the price of milk is going to decrease next week you are going to buy less today because the demand will decrease. If you think the price is going to increase next week you are actually going to buy a whole not more today. So that is going to increase the demand, now it's time to cover a super important that you have to watch out for. It is the difference between a change in quantity demanded, and change in demand.
So look at his graph for milk, right now you see three points. A, B and C, and there are two ways to go from ten to twenty units, movement from A to B along the demand curve is a change in quantity demand. So when the price goes down from three dollars down to two dollars, the quantity demanded goes up forms ten to twenty. Now A to C is a change in demand, price does not change, price stayed at three but people decided to buy more, why? Well because the five shifter’s, like taste and preferences that people prefer and want more milk than the entire demand curve will shift to the right. At that same three dollar price people want more so that could change the demand. It is a change in demand...
So I got a question for you, what happens to the demand for a product when the price goes down? Oh gosh this is a bad idea! So the answer is nothing. When the price goes down, demand stays exactly the same. Price causes the quantity demanded to change, the only thing that changes quantity demanded is the change in price, and the only thing that changes demand is one of the five shifters of demand. Oh man I think I'm lactose intolerant. I need those Cheerios. We are good. We are good. And we are done. Make sure to take a look at the next video.
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Supply and Demand: Crash Course Economics - Video 2
Transcript
A: I am Mr. Clifford and this is Adriene Hill and welcome to Crash Course Economics. Let's start by talking about something that most people take for granted.
B: Is it grocery store? Is it the simpsons? Is it the census? is it GPS? Is it goldfish? Is it frogs? Oh it's probably these strawberries right?
A: No, I was gonna say markets.
B: But, strawberries are great.
A: Yeah! but where do you think strawberries came from?
B: The ground, the farmer, the market the grocery store, the miracle life?
A: Now look around you. Where did all that stuff come from? And who made it? And why? Well, the answer is simple, but it’s underrated. It’s markets and for most of us farms and factories and stores, but mainly it’s just markets. Can I have a strawberry now?
B: So a market is any place where buyers and seller meet to exchange goods and services. The key to markets is the concept of voluntary exchange. That is, that buyers and sellers willingly decide to make a transaction. Let's say you go to a farmers market and you boy a box of strawberries for three dollars, you value the box of strawberries more than the three dollars you gave up to get it. The seller valued the three dollars more than the box of strawberries. The transaction is a win-win because you got your strawberries and the farmer got his money. You both felt better off, that is voluntary exchange. This same process happens in the labor market. Say that instead of farmer’s market, you bought your strawberries at your local supermarket. The cashier voluntarily decided to work there. He values a 10 bucks an hour he makes there more than he does sitting at home watching the walking dead. At the same time, the owner of the store values the labor of the cashier more than 10 dollars an hour she pays him. And so it goes, on and on, all the way up the chain of production, from the driver that delivered the strawberries to the farmer that grew the strawberries to the tractor the farmer purchased. The point is that markets are everywhere and most are based on voluntary exchange.
A: The part of all this that most people take for granted is how efficient the system is. Competitive markets turn out to be pretty great about allocating or distributing our scarce resources towards our most efficient use. So if farmers produce, like, too many strawberries, then the price will fall as sellers try to sell them off. Lower prices means less profit of strawberry farmers, and those farmers will have an incentive to produce something else like lettuce or Brussels sprouts. So if farmers do not produce enough strawberries, buyers will bid up the price and the farmer will have an incentive to produce more, which then drives down the price. That's like magic except it's not. The information that markets generate to guide a distribution of resources is what economists call price signals. Markets also incentivize the production of high-quality products. If the strawberries are brown and nasty then no one is going to want to buy them, and if the tractor’s a piece of junk, the strawberry farmer is going to tell other formers to buy other tractor. Now, ideally the eventual result of voluntary exchange so that sellers cannot make themselves better off without making something that makes buyers better off. Businesses, and in particular large corporations, are often villainized as greedy, heartless institutions, that take advantage of consumers, but, if markets are transparent and buyers are free to choose, then businesses will have hard time taking advantage of people. Now obviously greed and deception happen in real life, and three are situations when consumers don't have a choice, but for the most part, if you really don't like the policies or practices of a particular company, then do not shop there. After all, in the free market, every dollar that is spent signals to producers what should be produced and how it should be produced.
B: We have established that prices and profit determine where resources should go, but where do prices come from? Who determines the price of my box of strawberries? To answer that we are going to draw -get ready for it- supply and demand. Let’s go to the runway.
A: There is only one thing you should economics demand. Let’s use the market for strawberries to help us understand this concept. Up here on the Y axis, we have the price of strawberries, down here on the X axis we have the quantity of boxes of strawberries. Let’s start by looking at buyers and how they respond to a change in price. If the price goes up for strawberries, then some buyers will go buy blueberries or they will go on that all banco diet. The point is they are going to buy less strawberries. And if the price goes down for strawberries, then people are going to buy more. This is called the law of demand: when the price goes up, people buy less, when the price goes down, people buy more. On the the graph it is shown by a downward sloping demand curve. Now let's think about sellers like the farmer in the farmer’s market. If the price of strawberries goes up, then that farmer will make more profit, so will have an incentive to produce more strawberries. If the price goes down then he is not going to want to produce strawberries. That is called the law of supply, and on the graph it is shown by an upward sloping supply curve. Now let's put demand and supply together. If the price is really high at ten dollars then producers would like to produce a lot of strawberries, but consumers don't want to buy them. This mismatch is called a surplus. And if the price goes down for strawberries, let's say down to one dollar, then buyers want to buy a whole lot, but producers won't have an incentive and they will produce very little. Again you have a mismatch, but this one is called a shortage. And there is only one price where the quantity that buyers want to buy is exactly equal to the quantity that sellers want to sell, and it is right here where supply equals demand. The price is called the equilibrium price, and the quantity is called the equilibrium quantity.
B: Okay, sure your graph makes sense, but the price of strawberries isn't always three dollars; sometimes it goes up to six dollars, and at Whole Foods, local, artisanally grown strawberries, the fancy strawberries can cost upwards of twelve dollars. But I guess Whole Foods is a whole other world where price has nothing to do with realistic economics. We will stick to normal strawberries. In fact, the prices for all sorts of stuff change all the time. External forces can shift both the supply and demand curves, changing the equilibrium price and quantity. For example, let's assume that this graph shows the demand and supply of strawberries in the summer. What happens in the winter? Will the change in weather affect buyers’ demand? Or producers supply? Spoiler alert: it is supply. Colder temperatures make it harder to grow strawberries. The result is the entire supply curve is gonna shift to the left. This is because at all possible prices, there would be fewer strawberries produced. That’s it. This graph is just a tool that economists and everyone else used to show the results of a change in a market. I know it seems complicated at first, but there really only four things that can happen in a market. Supply can decrease, supply can increase, demand can decrease, or demand can increase. Some people might wanna talk about a price being fair or right. Well, that all depends on your point of view. The buyer always considers a low price to be a very fair price, while the seller considers it unfair and vice versa. In general, economists do not really like to push opinions about prices. Voluntary exchange suggests that the price is there for reason. For example, assume the demand for strawberries inexplicably falls, so the demand curve shifts to the left and the equilibrium price and quantity fall. Farmers might go to the government for assistance, but most economist would argue there is no reason to bail them out. The market is spoken. Strawberries are so over. Furthermore, if the government helps the farmers by giving them a subsidy, it would be putting resources towards something that society does not value. That would be inefficient. Luckily every reasonable person on earth values strawberries, so they continue to get produced.
A: Now, the downside is, the supply and demand model only applies to analyzing strawberries. Nah, I’m just joking; it applies to all sorts of stuff. In fact, let’s look at a market for a commodity known for its volatility, both because of its fluctuating prices and because sometimes, it explodes: gasoline. Now when see gas prices are moving all over the board, that's just demand and supply. For example, in 2014, the retail gas price in the united states fell dramatically. Why? Well, it was demand and supply. The economies of both Europe and China weakened, which decreased. The demand for gasoline, shifting the demand curve to the left. At the same time, new fracking technology and resorted production of oil in Iraq and Libya causes the supply of gasoline to increase, or shift to the the right. The combination drove gas prices down by more than 40% per gallon. And that's it. Now you can tell all your friends you understand supply and demand. It's a big day for you. It's a big day.
B: So markets and supply and demand are awesome. But sometimes, they are not awesome. For example, we dont want to use the market approach when it comes to firefighters. - “911, what’s your emergency?”
A: My house is on fire, how much do you charge to put it out?
B: It'll be $10,000, what's your credit card number?
A: They are all melted!
B: Okay, that one’s obvious, but what about the market for human organs? After all, there is a huge shortage, and thousands of people die each year waiting for transplants. Should there be a competitive market for human kidneys? A free marketeer would say sure, why not? If a donor wants $15,000 dollars more than he wants his other kidney, why stop him?
A: Well. Ethics. I mean, there's several problems that arise with an unregulated market for human kidneys. First is the moral question, is it fair for a poor person who can't afford a kidney to die while a rich person lives? Well, probably.. no, not at all. Another problem results in the law of supply. When there's an increase in the price of kidneys, there's an incentive for people to steal and sell kidneys. In fact, the world Health Organization has stated, “payment for organs is likely to take unfair advantage of the poorest and mas vulnerable groups, undermines altruistic donations, and leads to profiteering and human trafficking. I mean, all bad things. Now, that being said, why do 70% of American economic association members support some kind of payment for organ donors?
B: Well, it's because you can solve some of these problems with a market approach, but the market must be regulated. Often family and friends are willing to donate a kidney, but they're not a match for the patient. Economists generally support creating kidney exchanges, where pairs of willing donors are matched with strangers that agree to donate to each others’ loved ones. In both cases, the supply of donated kidneys would increase, which would alleviate some of the shortage. Like we have said before, free markets are awesome, but they can't solve all our problems. Sometimes, they need to be regulated, and sometimes they should be avoided. So there you have what, for most people is the start and for many, the end of economics. Supply and demand. Economists and politicians often like to refer to the interaction of supply and demand as laws, and we have done that, too, but to be clear, it’s not an absolute law, like the law of gravity.
A: As we have tried to point out here on Crash Course, economics is about human choices and their consequences. Even though supply and demand behave in predictable way that we have seen in the models, we cannot lose sight of the fact of them are reliant on humans acting as buyers and sellers.
B: Our actions influence supply and demand in a way they cannot influence gravity, no matter how much we might want to.
A: Whoa!
B: That's after effects. And that is something to keep in mind when you hear us or anybody talking about economic laws. Thanks for watching! We’ll see you next time.
A: Thanks for watching Crash Course Economics, it was made with the help of all these nice people. You demanded it, and they supplied it. Now, if you want them to keep supplying it, please head over to Patreon. It’s a voluntary subscription platform that allows you to pay whatever you want monthly to help make Crash Course free for everyone forever. Thanks for watching DFTBA.
Retrieved from: https://www.youtube.com/watch?v=g9aDizJpd_s
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