The Market Forces of Supply and Demand

00:01 Hello. And welcome back to your online presentation on Microeconomics.

00:04 My name's James DeNicco.

00:06 In this presentation, we're gonna be talking about the Market Forces of Supply and Demand.

00:11 We're gonna be looking at what a market is.

00:14 We're gonna look at market demand and how it's related to price.

00:18 We're gonna look at what can shift the market demand curve.

00:22 We're gonna look at what market supply is. How that's related to price? What can shift the market supply curve? And we're gonna look at how we come to our equilibrium? So, that might all be a little confusing now. As we go through the slides, that'll make more sense.

00:37 So, what is a market? A market is just any time there's a group of buyers and sellers, okay? Your buyers they're gonna determine your demand.

00:45 Your sellers, they're gonna determine your supply.

00:48 So, you say this: whenever there's a group of buyers and sellers out there, there's all kinds of markets.

00:53 There's the housing market, there's a market for shoes, there's actual markets where you can go and haggle for prices and buy fresh fish or buy fresh produce.

01:02 Any time there's a group of buyers and sellers, that's a market.

01:06 So, here we're gonna assume perfect competition.

01:09 So, this is gonna be a simplifying assumption that's gonna allow us to get some of the intuition behind the market forces of supply and demand.

01:17 So, what does that mean? It's gonna mean that all goods being offered are identical.

01:22 So, there's no advantage, "My good's better than your good. Your good's better than my good".

01:27 So, people are willing to pay different prices.

01:29 The goods are all gonna be identical and the buyers and sellers are gonna be so numerous that nobody's gonna have any control over the price.

01:37 So, these are the assumptions that we're gonna go into when we talk about market forces of supply and demand.

01:43 So, if we violate some of those assumptions, some of the things we say might not work, okay? So, we're gonna make those assumptions. So, keep those assumptions in the back of your mind.

01:52 If you hear something I talk about and you say, "Well, what if this happened.

01:55 That might not work?" Well, that might be the case but we're violating the assumptions.

01:58 So, we're gonna set these simplifying assumptions there first then we're gonna move forward so we can draw some intuition out of these market forces of supply and demand.

02:07 So, first, let's take a look at Demand. So, what is Demand? Well, the quantity demanded, that's the amount of goods buyers are willing and able to purchase.

02:16 So, it's nice to wanna purchase something but we have to have the money in order to be able to do it.

02:20 So, the quantity demanded is not just what you want but it's what you want, and you're able to buy. So, here you see what we call our demand curve.

02:28 And you'll notice that it's downward sloping. That's due to the Law of Demand, okay? So, what we're saying here is as prices go down, the quantity demanded increases.

02:38 And that makes sense, right? If you go to the mall and you wanna buy a pair of shoes, you get there, you find there's a half off sale, you might buy two pairs of shoes.

02:47 So, as the price goes down, we're gonna buy more stuff.

02:51 We increase the quantity that we demand.

02:53 So, in this slide, we have our demand schedules, okay? So, we're looking at individual demand versus market demand.

03:00 So, the individual is just part of the market.

03:04 The market is made up of a bunch of individuals. So, it's actually very simple.

03:08 So, let's just assume that there's two people in this market, okay? There's gonna be me then there's gonna be somebody else a little less thirsty.

03:16 So, when we put my demand plus this other person's demand together, we're gonna have our market demand. We're just adding them up.

03:23 So, you'll see here. At a price of $12, I'm not buying any beers.

03:27 At a price of $10, I'm gonna buy two beers, alright? You'll notice as the price goes down, I demand more. I'm talking about beer again.

03:36 This is one of the things I enjoy.

03:38 So, you'll see as the price goes down to $8, I'm gonna demand four beers.

03:42 As the price goes to $6, six beers and so on down the line.

03:47 Now, you know, this other person will call them less thirsty.

03:51 Yes, at $12, they still buy zero beers.

03:54 But as the price goes down to $10, they only buy one beer as opposed to my two beers.

03:59 And all the way down the line, they only buy half as many beers as I do at any given price.

04:05 So, those are our two individual demands.

04:08 To find the market demand, we're gonna simply add them together.

04:11 So, both of us, right? We buy no beers at $12.

04:15 So, you're gonna see the market demand is zero.

04:17 But now for a mark, for a price of $10, it's gonna be two beers for me and one beer for this person who's less thirsty, so that you have three beers being purchased at a price of $10.

04:28 And on down the line, the market demand is just the individual demand added up.

04:32 So, as prices go down, the quantity demanded is gonna increase, alright? So, it's very simple. Just all the individuals in the market, here, the beer market, they're gonna add up for that beer market demand. Alright.

04:45 So, now again, we have our graph here of our Demand, okay? We have our demand curve. So, take a look along that vertical axis.

04:53 You're gonna see prices. Along the horizontal axis, you're gonna see the quantity demanded.

04:58 So, what's that tell us? Whenever you look at a graph, you should look at the vertical and horizontal axis to know what you're looking at, alright? So, what this tells us is, as prices go down, the quantity demanded is gonna increase.

05:10 So, whenever there's a change in price, the change in quantity is gonna be a movement along that curve.

05:16 Anything else that changes the quantity demanded is gonna be a shift in the curve.

05:21 So, anything that increases the amount we demand at a given price will be a rightward shift in the demand curve.

05:29 So, you see, we start here in the middle, if you draw a line straight across that a given price, a shift right in the demand curve means at any given price, we demand more.

05:39 A leftward shift in the demand curve, that means at any given price, we demand less of that good.

05:46 Now, there's a number of factors that can shift the demand curve, and now that's what we're gonna go through.

05:51 But one more time, if it's a change in the price, it's gonna be a movement along the curve.

05:56 Anything else that changes the demand is gonna be a shift in that curve.

06:01 So, let's take a look at some of the things that can shift our demand.

06:04 The first, changes in income, okay? It's gonna depend on what type of good is.

06:10 There's two types of goods. There's normal goods and there's inferior goods.

06:14 So, a normal good the more income we have, the more we want of it.

06:18 So, my normal good here is a steak dinner, right? Delicious steak.

06:22 So, the more money you have, the more often you're gonna wanna go out and buy yourself a delicious steak, okay? So, for a normal good, if we have an increase in income, it's gonna be a rightward shift in the demand curve.

06:36 So, if I go back to the demand curve, you look, what's happening with along the horizontal axis? Quantity is increasing. So, a rightward shift is always an increase in the quantity demanded.

06:46 So, now, back to my steak, a normal good. The more income I have, the more I want of it.

06:51 It's not a change in price. So, we're not moving along the curve.

06:54 It's a change in my income for normal good. I want more steak.

06:57 It's a rightward shift in the demand curve.

07:00 Now an inferior good, this sloppy thing, whatever it is here, I think it's some sort of hotdog.

07:06 So, an inferior good. The more income you have, the less of that good you want.

07:11 A lot of people talk about college students and ramen noodles.

07:15 So, ramen noodles might not be the best thing in the world, right? They're not tasty but they're cheap.

07:19 So, you don't have a lot of money you're going through college, you buy a lot of ramen noodles.

07:23 However, as you get out of college, if you have more money, maybe you start buying Campbell's chunky soup, something a little better, a little more delicious, but it costs a little more, okay? So, for an inferior good, the more income you have, the less of that good you want.

07:38 So, back to our sloppy hotdog here, okay? If our income goes up, the demand curve for sloppy hotdogs is gonna shift to the left.

07:47 We're gonna demand less hotdogs when we have more income.

07:52 So, that's the first thing that can shift our demand curves, changes in income but it depends on what the type of good is, normal or inferior.

07:59 What else can shift our demand curve? Well, a change in the price of related goods can also shift our demand curve.

08:06 And it depends on the relationship of those goods.

08:09 We either have substitutes or complements.

08:12 Substitutes, that's when you replace one good for another good.

08:15 And then, usually happens if the goods are kind of close.

08:17 So, say coffee and tea here. So, maybe you think you're a loyal coffee drinker.

08:21 Your coffee costs you about $2 a day.

08:24 Well, if there's a coffee bean infestation throughout the world and the price of coffee shoots up to $10 a cup.

08:31 So, you go to Starbucks, you could go to your local coffee store, you say I want a cup of coffee.

08:35 It goes from two to $10.

08:36 Well, you might find your loyalty tested there a little bit, maybe you'll switch over to tea, okay? So, the price of the related good will determine your demand for the other good.

08:48 So, if it's coffee and tea, so, let's talk about the demand curve for tea.

08:52 If the price of coffee goes up, the demand curve for tea will shift to the right, we'll demand more tea as the price of coffee goes up.

09:02 We'll substitute away from coffee towards tea.

09:06 Now, if the price of coffee goes down, you're gonna see the demand curve for tea shift to the left.

09:12 We're gonna buy more coffee.

09:13 The two are close enough that we're willing to have one or the other depending on the relative prices, okay? So, if there's substitutes, the price of one good goes up, you're gonna demand more of the other good, you're gonna substitute away from it.

09:26 You also have complements. Here I have peanut butter and jelly.

09:29 Complements, their goods that go together, right? So, if you have some peanut butter, what's good without the jelly, right? So, you can get the peanut butter and jelly together in a sandwich and don't enjoy that delicious treat, right? So, peanut butter and jelly go together.

09:43 So, now if the price of jelly goes up, what happens to the demand for peanut butter? Well, we'd like to buy them together.

09:51 So, if the price of jelly goes up, the demand curve for peanut butter is gonna shift to the left.

09:56 We're gonna want less peanut butter because we buy less jelly.

10:01 Now, on the jelly demand curve, it's gonna be a movement along the curve, right? The prices of jelly go up. We demand less jelly, but it's a movement along the curve.

10:10 But it's not just gonna affect the jelly market. It's gonna affect the peanut butter market.

10:14 The price of jelly rises, we demand less peanut butter. It's a leftward shift.

10:19 Now, if the price of jelly comes down, we're gonna want more jelly, we're also gonna want more peanut butter for our delicious peanut butter and jelly sandwiches.

10:27 So, the price of jelly comes down, you'll see a rightward shift in the demand curve for peanut butter.

10:32 So, now we have changes in income and we have changes in the prices of related goods.

10:37 Both those things will shift our demand curve.

10:39 There's other things that will shift the demand curve as well.

10:42 So, a change in taste. So, say I'm watching TV.

10:45 It's the Super Bowl or something and they come out with some new ad about these delicious new hot wings that they have at Buffalo Wild Wings.

10:53 Well that might change my tastes for wings.

10:55 It's not a change in the price of wings. It's just a change in my taste for wings.

10:59 So, if I have a greater hunger for those wings, it's gonna be a rightward shift in the demand curve. It's pretty obvious one, right? If I decrease my taste for that, that could be leftward shift in the demand curve.

11:11 Also, changing expectations. So, say we expect our income to go up and it's for a normal good.

11:19 We'll start acting accordingly now.

11:21 We think that our income is gonna go up in the future, we expect that so we're not gonna wait for the future so that we can start demanding more of any given good.

11:30 We'll start doing that now.

11:32 I expect, maybe I'll start making $20 an hour or more, next month.

11:36 So, I'm gonna start buying more steak dinners now.

11:40 If I expect my income go up in the future for a normal good, steak dinner, my demand curve will shift to the right.

11:47 So, we had changes in income depending on whether it's a normal good or inferior good.

11:52 We had change in the prices of related goods depending on whether it's substitutes or complements.

11:56 We have change the taste and we have a change in expectations.

12:00 There's also a change in the number of buyers.

12:03 Obviously, the more buyers there are, the more demand there's gonna be for any given product.

12:08 So, if you're in a small town with fewer number of people, there's gonna be less demand for a product than if you're in a city with millions of people.

12:16 Obviously, with millions of people, there's more buyers. There's gonna be greater demand.

12:20 That will shift the demand curve to the right.

12:23 Less buyers, it would shift the demand curve to the left. Alright.

12:27 So, just drive this home one more time.

12:29 So, you can try to accomplish the same goal in two different ways.

12:33 So, we want people to quit smoking. So, that's what we're showing here in this slide.

12:36 Maybe you can attack that in two different ways.

12:39 One by trying to change the price, alright? Which again is a movement along the curve, that would be a cigarette tax.

12:45 So, you wanna curb smoking.

12:47 So, you raise the price of cigarettes by putting a cigarette tax on.

12:51 So, what does that do that would move us along the curve? Yes, people are pretty loyal to cigarettes but on the margins, maybe you'll get some people to stop smoking, you'll move along that curve to the left as the price of cigarettes goes up.

13:03 Or you could try an anti-smoking campaign.

13:06 You see a lot of commercials out there that try to scare people into not smoking.

13:10 They show the negative consequences for people, say they have to have heart surgery or they have to have limbs amputated.

13:17 They show this stuff. It's very graphic on TV now to scare people from smoking.

13:21 And I'm pretty sure the stats bear it out that it's having some effect.

13:24 Less people are smoking these days. Well, that would be a shift in the curve, okay? It's not a change in the price of cigarettes.

13:31 It's the change in taste for cigarettes from a successful anti-smoking campaign.

13:36 So, one more time a change in prices is a movement along the curve.

13:40 Anything else that would change your demand for a good, is gonna be a shift in the curve, okay? Now, let's get to supply.

13:49 So, you'll notice now our supply curve is gonna be upward sloping, okay? So, what is the quantity supplied? It's the amount of good that sellers are willing and able to sell.

13:59 So here, we have price.

14:00 The price that they can get for their product. Now, makes sense, right? Our law of supply, the higher price that they can get for their product, the more they wanna supply it.

14:11 And to get a higher price for a good you wanna make more of it to make more money, okay? So, we see this upward sloping supply curve.

14:19 Again, just like in the market for demand, the market for supply, you just add up the individual supply.

14:28 So, say again, we'll go back to the beer market, alright? You have two people in the beer market here.

14:34 One Dogfish Head, they supply a nice IPA that I like.

14:37 Other Firestone Walker double jack, that's probably my favorite beer.

14:41 It's nice double IPA. It's kind of hoppy, okay? So, both of them are suppliers of beer.

14:46 And you'll see as the price goes up, they're willing to supply more.

14:51 However, they have different supply schedules, alright? To get to the market supply schedule, you simply add them up.

14:59 So, at $2 neither one are willing to produce, zero plus zero is zero.

15:03 But at $3, Dogfish Head is willing to produce one, Firestone Walker double jack, they're still producing zero. You add that up, one plus zero is one.

15:12 So, at $3, our market supply of IPAs here is gonna be one beer.

15:17 And as you go down the line for the market supplies, the price increases, they're willing to supply more.

15:23 Again, any change in price is gonna be a movement along that supply curve.

15:28 I know, I keep going back to that. It's because I -- my students always forget that.

15:33 That always confused them. You have to take a look at that graph.

15:36 Take a look at the vertical axis and the horizontal axis.

15:40 You see that prices are on the vertical axis, quantity is on the horizontal axis.

15:44 So, any change in price, that's what that graph is illustrating.

15:48 The movement along the curve is the relationship between prices and quantity.

15:53 Anything else that's gonna change the quantity supplied is gonna be a shift in that curve.

15:57 Again, an increase is to the right, a decrease is to the left, try to get away from saying up and down.

16:04 Because you'll notice here that an increase in supply, it's a rightward shift, just like in demand.

16:11 But now, it's down.

16:12 For demand, which is downward sloping, the rightward shift is up.

16:17 Here for supply, which is upward sloping, a rightward shift is down.

16:21 So, get away from up and down, it will confuse you, just talk in terms of right and left.

16:26 You see the quantity on the bottom on the horizontal here increases to the right.

16:31 So, always talk in terms of left and right.

16:34 So, anything that increases the quantity supplied other than price is a rightward shift in supply.

16:39 Anything that decreases the quantity supplied, other than price is a leftward shift in supply.

16:45 So, now let's take a look what can shift our supply curves.

16:50 Well, the first, input prices.

16:51 As we go back and look at the graph, yeah, prices are on there.

16:55 So, you're telling me prices change. It's a shift.

16:58 It's not a movement along the curve. These are different prices, alright? On that graph, it's the price that you can get at market for your good.

17:06 Here, we're talking about input prices. So, another one my favorite foods sausage here, right? Say there's some sort of problem with the pigs out there, there's mad pig disease and a lot of the pigs die, that'll raise the price of pork to make the sausage.

17:21 So, what's happening is, you're getting the same price at product for your sausage.

17:26 You're still only able to sell it for $2. But now the cost of making the sausage goes up.

17:32 Your profit margin shrink. So, it costs more to make.

17:35 You're getting the same amount at market for that good.

17:38 You're gonna wanna supply less.

17:40 So, as your input prices go up, it will be a leftward shift in the supply curve.

17:45 As input prices go down and you're still able to sell it at that same price, now, your margins are bigger.

17:51 You're gonna wanna increase your supply that will be a rightward shift in the supply curve.

17:56 Also, technology, okay? So, if there's an increase in technology, that makes us more efficient at making some of this, like our input costs have gone down. So, we'll go back one slide and look here.

18:08 They have their handy dandy hand crank sausage machine.

18:12 So, you go from that handy dandy hand crank sausage machine, you get a little money.

18:16 You buy some capital. You buy some technology.

18:18 You get this industrial sized sausage making machine you have hold on with two hands, right? What do you notice? In this picture, you need two people.

18:28 In this picture, you just need one person.

18:31 Because of technology, now, you can just pay one person instead of two.

18:35 So, the costs of making that product have gone down.

18:38 So, increases in technology that make you more efficient at making something, lower your labor cost, that's gonna be a rightward shift in the supply curve.

18:47 You're still getting the same price at market for that product but it costs less to make it because you're more efficient with more technology.

18:56 So, first, we had input prices and technology, also a change in expectations.

19:01 So, you're gonna act accordingly just like you do with demand.

19:05 So, if you expect input prices to go up, you're gonna have a leftward shift in the supply curve now.

19:11 You're gonna start bracing or planning for the future.

19:14 If you expect input prices to go down, you'll have a rightward shift in the supply curve, you'll start to supply more now.

19:20 Also, just like the change in the number of buyers affects the demand curve, a change in the number of sellers affects the supply curve.

19:28 So, you look here, I think I have a food court at the mall. There's a lot of people selling, right? There's a lot of sellers there.

19:35 So, as the number of sellers increase, there's gonna be an increase in the supply.

19:39 It will be a rightward shift in the supply curve. That makes sense, right? There's more firms producing with more production, there's more supply.

19:48 So, now let's put it together, alright? We got our downward sloping demand curve and our upward sloping supply curve.

19:56 Where they come together, that's gonna be our equilibrium, which a situation in which the market price is reached the level at which the quantity supplied equals the quantity demanded.

20:07 So, you have your downward sloping demand curve, your upward sloping supply curve, where they come together, you have your equilibrium price and your equilibrium quantity.

20:16 So, Adam Smith, the invisible hand tells us that that equilibrium is where we're gonna naturally be moving towards in a perfectly competitive market.

20:26 So again, that's where our assumptions come into play.

20:28 A perfectly competitive market with no externalities, no inefficiencies, we're gonna get to that equilibrium.

20:33 That's not to say we'll get there right away. Firms aren't perfect.

20:38 So, what if they set the price too high? What you're gonna see is they're gonna have a surplus of goods, the supply is gonna be greater than the demand they made too much at that high price.

20:48 In order to sell they're gonna have to lower their price.

20:51 They're gonna have all that inventory sitting on their shelf.

20:53 They don't wanna sitting it there across the money.

20:55 So, they're gonna have to lower the price towards equilibrium in order to sell.

21:00 Now, what if they start too low? What if they price it too low? Now you'll see the demand is greater than the supply. We call that a shortage, right? There's not enough good out there, there's not enough those goods out there to meet the demand.

21:14 So, what's gonna happen there is, there's gonna be a greater demand than supply.

21:17 People are gonna start to offer higher prices.

21:19 They're gonna say, "Well, I want that. I'll offer you a higher price for that good".

21:23 So, that's gonna pull the price up towards the equilibrium.

21:27 So, if you start too high, the price is too high, there's gonna be downward pressure towards equilibrium.

21:32 If you start in your price at too low, then there's gonna be upward pressure towards equilibrium.

21:37 Eventually, the firm's will get it right and will be at the market equilibrium, the price and the quantity.

21:44 Now, I've been talking a lot about movements along the curve.

21:48 So, how does that happen? It doesn't just happen in a vacuum, okay? It usually happens because one of the curve shifts and there can be government regulation with price ceilings and price floors that can [exogenously 21:58] go in there and change the prices.

22:02 But in a perfectly competitive market, our changes in prices are gonna come from a shift and one of the curves.

22:07 So, here, I show an increase in Demand.

22:10 So, let's say it's a normal good, it's our steak, and we have more income.

22:14 What we'll see is a rightward shift in the demand curve.

22:17 Well, what's that gonna do? That's gonna increase the price.

22:21 As demand goes up, the price goes up.

22:24 So, as the price goes up, we're gonna be moving along the supply curve to the right.

22:28 So, a rightward shift in the demand curve raises that price.

22:32 Now, we move along the supply curve.

22:34 We have our new market equilibrium here, a higher price and higher quantity.

22:38 Well, how about a decrease in demand? So, it's an inferior good, it's our ramen noodles.

22:44 All of a sudden, we have more income. So, we demand less ramen noodles.

22:48 That's a leftward shift in the demand curve.

22:51 So, when there's a decrease in demand that lowers the price.

22:54 As the price comes down, we're gonna supply less.

22:58 We're gonna move along the supply curve to the left.

23:01 So, now we have our new market equilibrium, we have lower quantity, and we have a lower price.

23:07 How about the flip side with supply? So, our input prices go down.

23:12 If our input prices go down, we're gonna wanna supply more.

23:15 It's gonna be a rightward shift in the supply curve.

23:18 So, as there's an increase in supply, that's gonna lower the price.

23:22 Now, as the price comes down, we're gonna demand more but it's gonna be a movement along the curve.

23:28 So, we're gonna go from our original market equilibrium, we're gonna move to the right, we're gonna have a higher quantity and the lower price.

23:35 You could have a decrease in the supplier, input prices go up, right? Or mad pig disease, all our pork dies, so, it costs more to make sausage.

23:45 So, there's gonna be a leftward shift in the supply curve.

23:48 So, as there's a leftward shift in the supply, supply decreases, that drives prices up.

23:53 As prices go up, we demand less along the demand curve.

23:57 We're gonna have a new market equilibrium at a higher price and a lower quantity.

24:02 So, both of them can also move.

24:05 So, here in this instance, I have supply decreasing and demand increasing.

24:10 So, the same things happen in both graphs but the quantity of the shifts are different.

24:15 So, in this first graph, here, I have a larger shift in the demand curve, then I have a decrease shift or a leftward shift in the supply curve.

24:23 So, what's happening here, because demand increases to the right, more than supply decreases to the left, overall quantity is gonna increase.

24:32 Now, both those shifts drive up price.

24:34 So, you know which way the price is gonna go if there's a leftward shift in supply and a rightward shift in demand.

24:40 But you don't know about the quantity. It depends on which one shifts more.

24:44 So, in this graph on the right here, as the decrease of the leftward shift in supply is larger than the rightward shift in demand.

24:52 So, if that happens, you're gonna see that the quantity decreases.

24:56 In both examples, the price goes up, because a leftward shift in supply and a rightward shift and demand both drive up the price.

25:04 But it depends on the size of the shift, the magnitude of the shift, what's gonna happen here with quantity. So, just in case all that was confusing, I put together a handy dandy little cheat sheet for you so that you can take a look.

25:18 So, if it's a change in supply, or a change in demand, what's gonna happen to the equilibrium? I'm not gonna go through all these different examples.

25:25 I put this here so that you have it as a little cheat sheet so you know if you're moving supply or demand or you're moving both of them, you can make sure you're right with what happens to your equilibriums.

25:36 So, what have we covered? We know what a market is, right? We know what market demand is. We know what market supply is.

25:43 We know how prices move us along those curves.

25:46 We know what allows or what forces shifts in the demand and the supply curve and we know about our market equilibrium.

25:53 We know when one curve shifts, there's gonna be a movement along the other curve.

25:57 So, that was your presentation on Market Forces of Supply and Demand. Thank you.