so in this video we'll continue with our discussion from last week when we introduced the supply and demand concepts and talked about supply and demand schedules and curves and producer and consumer surplus and we're going to take it another step further this week where we talk about equilibrium and competitive markets and there's a document on canvas again with some notes in it that you can use as we go through the video to hopefully help you follow along so what do we mean by competitive markets i think it's maybe the first thing we should talk about so these are markets with a lot of buyers and a lot of sellers so an example from the last class would be the lobster market we discussed um so we thought of a scenario where there's a bunch of people who are potentially going to purchase these lobsters a bunch of people who are potentially going to sell lobsters and the important uh feature of those markets that comes out of that is that all of the participants all the buyers and all the sellers we can think of as priced takers so that means that they can't influence the price of the good in the market with their own actions another way to think of that is that um they're all gonna all of the buyers and sellers will make their own decisions um with the price taken as given so if you just think about your own decision about purchasing some good for example you see the price in the market so you can even think of lobster you know you see the price of lobster at a store or restaurant and you make a decision about whether or not you're going to purchase and in that case you have no influence over the price you just view it and you make a decision accordingly so that's the type of market that we're thinking about when we talk about competitive markets so to give you an example of a market that would not be considered competitive one that we'll talk about later in the semester and one that you're probably familiar with the concept would be a market with a single producer which would be a monopoly or the producer would be the monopolist and we're going to wait to cover that until later in the semester but i think it's a good example that you're probably familiar with so in that case we can preview the later discussion i suppose we have a single producer of a good in a market and when that happens that producer is no longer considered a price taker because their actions can influence the price in that market and so that's kind of the extreme example of a market that would not be considered competitive but for now and for a while we're going to just talk about competitive markets more for almost completely talking about competitive markets okay so now that we have that concept uh in mind the next thing i want to talk about is what does it mean to have an equilibrium in a competitive market so today as we go through um the the videos for this week we're going to talk about this equilibrium concept and we're going to talk about finding equilibrium graphically or in table in a table form and then eventually we're going to talk about shifting supply and demand and how that affects the equilibrium so what does it mean to be in equilibrium in a market so when the market price is such that the quantity demanded is equal to the quantity supplied so remember from our discussion last time when we talked about supply and demand and the schedules and the figures for those the curves for those we were graphing the price against the quantity supplied or the or the quantity demanded or the quantity supplied depending on which curve we're talking about and so the demand for example told us at all the possible prices what was the quantity demanded what was the number of uh goods that consumers would like to purchase and then the supply curve for the supply schedule told us at all the possible prices what was the quantity supplied or what was the quantity that producers would like to produce so the equilibrium is the point where we have this price which we'll refer to as an equilibrium price where the quantity that buyers like to buy is equal to the quantity that sellers would like to sell and so that price quantity combination right so we'll oftentimes refer to this price as the equilibrium price or i'll write it as p star a lot of times and this equilibrium quantity right because we have a bunch of potential quantity um quantities on the demand curve and quite as little supply curve but at the equilibrium the quantity demanded is equal to the quantity supplied so we have one quantity that that is the equilibrium quantity in this case and i think when we as we go over this today it hopefully will become more clear or star so another way to say this is that at the equilibrium price all of the buyers who would like to purchase at that price are able to purchase and also at the same time at the equilibrium price all of the producers who would like to sell at that price are able to sell so the market uh clears in that sense and it's also means that we're at a stable point of sorts because there is no one left out who's willing to buy or sell at that equilibrium price so i think for our first example of finding an equilibrium let's go back to the example we used last week in the market for lobster so i've written up the demand or some points on the demand and supply schedules that we covered uh in our last last week so in the first column here i wrote the price and then the second column here this is q sub d standing for quantity demanded so these two columns describe the demand schedule or the demand curve and then in the third column here it says q sub s which is for the quantity supplied so the price and the quantity supplied column describe the supply curve so to talk about the equilibrium concept we need both the supply and the demand curves um and and this is putting them both together is how we characterize the market um all together so i think um and and we'll look at this schedule to find the equilibrium here but it might even be easier to think about finding it graphically first so if you remember last week we also [Music] graphed these two functions the supply and demand curves and i'm just going to draw them up just for the purposes of this example remember we have quantity on the x-axis price on the y-axis the intercept on the supply curve it was at 5. and of course supplies upward sloping and the intercept on the demand curve was 30 if you remember last time and of course demand is downward sloping so remember what the tables or the schedules tell us as well as the curves at all the different prices the demand curve the demand schedule tells us what's the quantity demanded and so if we picked some particular price we could use the demand curve to figure out what is the corresponding quantity demanded what is the number of units that the buyers would like to purchase and we could do the same thing with the supply curve if we picked a particular price we could find what is the quantity supplied the number of units that the suppliers would like to sell so in equilibrium we said it's the one or it's the price where the quantum demanded is equal to the quantity supplied so when we think about the figure here there's only one price in this figure where that's true so we have to find to find that price in this figure we're looking for this intersection point so where they intersect would be the equilibrium price or p star and you'll notice like we said in our definition or when we described what an equilibrium was at this price we could find the quantity demanded using the demand curve or we can find the quantity supplied using the supply curve but at this point those should be the same thing and those are the same thing and that is the equilibrium quantity or a q star so graphically because we have this demand curve that's downward sloping the supply curve that's upward sloping we're just going to have one point where the price is such that the quantity demanded is equal to the quantity supplied and that's how we can find our equilibrium price and our equilibrium quantity now if we come back to the schedules for a second to think about or to figure out what those values actually are in this example think about this just the demand schedule first so the first two columns at all these different prices this tells us the quantity demanded right so as we move along this demand schedule from higher prices where there's relatively low quantity demanded to lower prices where the quantum demand that is getting higher and higher increasing we can find the corresponding points on this schedule and that curve and you can think about the same thing for the supply curve using this last column here at these low prices there's a really low quantity demanded and as we increase the price the or sorry quantity supplied as we increase the price the quantity supplied goes up and there's one point where they're equal and so in this table right if we think about fixing a price and then comparing the quantity demanded and quantity supplied we need to find the case where those two things are equal and there's only one case here and that's where quantity demanded of 600 equals coin supplied of 600 at the price of 15. so to figure out what this actual pricing quantity are i'm using this table we found that this price here is 15. and that this equilibrium quantity is 600. i think it might help a little bit to expand on that if we consider what might happen at alternate prices and compare this table with the figure over here so first let's think about a potential price that's higher than the equilibrium price so if we think about this schedule over here we could just pick some price or let's just say what if what if we propose that the price of 25 is the actual equilibrium price well at a price of 25 we can see from the schedule here that the quantity demanded is 200 which is much less than the 600 we found in the real equilibrium and the quantity supplied is 1200 which is much more than what we found in the real equilibrium so in this case if if we thought the equilibrium price were higher some 25 just as a hypothetical here we would find that the quantity supplied is greater than the quantity demanded so this is different from what we just discussed because now all of the people who are willing to sell the good at a price of 25 are not able to find a buyer there aren't enough buyers who are willing to pay that price and we would call this a surplus in other words there's a greater number produced than people are willing to buy when that happens this would put downward pressure on the price back toward what we found to be the equilibrium now let's think about another possibility what if we propose or think that well maybe the equilibrium price is less than 15. let's see what would happen in that case so let's just pick a number let's analyze what would happen if the price were equal to 10. so at a price of 10. we can use a schedule here to figure this out or the function over here the quantity demanded would be 800 which is actually more than we found to be the equilibrium quantity and the quantity supplied would only be 300 which is less than we found to be the equilibrium quantity again if the price were lower than the equilibrium price we would find that quantity supplied is not equal to the quantity demanded although when it's lower than the equilibrium price we have a quantity demanded out here that's higher than the quantity supplied so this differs from the first case because now we have more people who are willing to pay that price than suppliers who are willing to produce at that price so rather than a surplus we would actually have a shortage but again because there are more people who would like to buy at that price than they're willing to sell at that price this puts upward pressure on the price back toward the equilibrium so in both cases what this exercise here that we're doing is just we found the equilibrium we found that at a price of 15 the quantity supply is equal to quiet demanded and i just think this exercise helps us see why that's in equilibrium why it's a stable point um and so we just did this sort of thought experiment where what if the price were higher what would happen what if the price were lower what would happen and in both cases we found that we expect the imbalance between the quantum demand and quantity supply to lead to pressure on the price that moves it back toward the equilibrium price so now that we have this equilibrium concept down to some extent here let's think about so now that we've figured out how to find the equilibrium here and why this is an equilibrium now let's talk a little bit about surplus so we're going to talk about surplus i just wanted to redraw the figure it was getting a little bit cluttered and this is the redrawn figure um notice that i just marked the important points here because we're going to calculate some areas and so to get those it's important to know these intercepts here and so remember the demand function intercept with the price axis is at 30 and the equilibrium price here is 15. the supply intercept was at five and then finally we need to know the equilibrium quantity which was at six hundred so remember this starting with let's start with thinking about consumer surplus so we talked about consumer surplus last time and calculated it a couple of times a couple different ways so remember when we talked about consumer surplus for an individual can individual consumer who just makes a purchase of one good we decided that we could use or we used the distance between their willingness to pay and the price that they had to pay as a measure of their happiness or their consumer surplus and graphically if we had a competitive market like this i'll remember that the demand curve comes from a willingness to pay a bunch of consumers and we know the equilibrium price now um but conceptually we're still doing the same thing we're thinking about the difference between uh the willingness to pay and the price for a bunch of different um uh purchases which are transactions and so we want to know the area between below the demand curve and above the price and that will give us a measure of the aggregate consumer surplus in this market and so to find that in this case remember the area for a triangle we need one half multiplied by this height here so 30 minus 15 because that's the that's the height of this triangle and then the width here is uh 600 so multiplied by 600 or if we simplify this a little bit we'd have 300 multiplied by 15. we also discussed producer surplus and we used the measure so think about a producer just making one one sale we use the difference between the price that they received and their willingness to sell so the minimum that they would have sold that for is a measure of their happiness with the transaction or their producer surplus so graphically here thinking about the same concept we want to know the distance between the price and the willingness to sell which is how we got to the supply curve for all these transactions added up which we could find as this area below the price and above the supply curve so again we'll use the area for a triangle one half and then the distance for the height here 15 minus five and the width is again 600 so if we simplify that a little bit we could write it as 300 times 10. and finally we could also calculate the total surplus in this market so if we wanted to calculate total surplus we could just write that as the consumer surplus plus the producer surplus and since we've already calculated consumer producer surplus um that one is just adding the two together so i don't think we need to go through the steps just carefully but conceptually it's a measure of the um aggregated uh surplus from both sides of the market so it's a measure of the sort of happiness over this this market if we added up all the surplus from everyone that's participating on both sides of the market now let's talk about there's this really nice feature of this market that we've set up here which is perfectly competitive we have a bunch of people just making their own optimal decisions about whether or not to buy or whether or not to sell this good and then we found we could measure the total amount of surplus in the market um and the really nice feature is that this uh by having everyone make their own decisions and in a perfectly competitive market like this we end up with the most surplus that we could have and to demonstrate that think about the surplus from a particular transaction think about just someone with this willingness to pay here buying a good from some producer with this willingness to sell here and if you remember the way we talked about this last week we could look at that distance between the willingness to pay and the willingness to sell to find the total surplus for that transaction and to the left of this quantity all of those are at least zero or more right so here the willingness to pay is higher than the willingness to sell which means for both people that participate it's worthwhile they're able to make a transaction that leads to an increase in total surplus on the other hand think about swapping out this buyer with some other buyer who has a much lower willingness to pay what if we took someone for example to the right of this to the right of this uh equilibrium quantity and think about their willingness to pay if we took the the ability to buy this away from this person and give it to this person who has a much lower willingness to pay that has to lead to lower surplus because remember uh the higher willing to pay right the the more surplus we get from from the transaction and on the other hand if we swapped out the the seller so think about um the case where we take away the right to make this sale from this seller and give it to someone else who has a much higher willingness to sell again that has to reduce surplus it has to reduce surplus because remember thinking about this distance here between willingness to pay and willingness to sell when this what we just discussed with this person if this is lower that's less surplus so similarly if this is higher that's less surplus so this is this naturally leads to this efficiency result which is that all the people who are willing to pay the most for the product are the ones who get to buy it and all the people who are willing to sell at the lowest price are the ones who get to sell it and that means that at the equilibrium price and quantity we've maximized the total amount of surplus that we could get out of this market so next let's talk about take sort of carrying over the same example we're going to think about some cases where there's a shift in supplier demand and how that could affect the equilibrium pricing so let's go over the couple of examples in the notes as well about the market for lobster and analyze how a shift in supplier demand can affect the equilibrium price and quantity in this market so this is just a generic example here generic supply and demand we have the equilibrium price and quantity that we found using the intersection of the two curves example a is what would happen in this market if the price of steak increases i think i said increases right yep if the price of steak increases so how is steak and the price of steak related to the market for lobster so if yeah i think we may have mentioned this last time so how is the price of steak or the market for steak related to the market for lobster i think we may have mentioned this last time you might think that steak and lobster are substitute goods so people that consume lobster may also like to consume steak and they probably are willing to substitute between the two and so we might think that the price of steak is related to the demand for lobster and in particular when the price of steak goes up we might expect people to shift their consumption away from steak which is now more expensive and toward lobster and so graphically and in this market we'll think of the price of stay going up leading to a shift out in demand so in other words at all the possible prices after the price of steak goes up people will then demand or yeah would like to buy more lobster so that's an increase in demand for for lobster and i'm going to just call this uh d0 for the first one and d sub 1 here so i guess i could refer to the equilibrium price and quantity and the initial set up as p sub 0 and q sub 0. because we want to eventually compare those with the new pricing quantity so after demand shifts out we can still follow the same steps that we did to find the equilibrium before which graphically we just wanted to find the intersection between the supply and demand curve but now we need to use the new demand curve to find the new equilibrium price in the new equilibrium quantity so we have p1 star here and q1 star here and when we go over these examples a common question that comes up here or one thing i want to take away from from these these examples is how does this affect the equilibrium price and how does this affect the equilibrium quantity so in this case the price of stake went up we think that leads to a shift in demand in the market for lobster and that leads to an increase in the equilibrium price and an increase in equilibrium quantity and we're going to go over several examples like this this week and then you'll have opportunities to do more in the homework as well for now let's do one more example and the market for lobster so i'm going to get rid of this and redraw this this figure so the second example that we'll look at in the market for lobster is what happens if the price of fuel that's used to catch lobster decreases so price of fuel goes down again we're just trying to come up with some general analysis here about how this affects the equilibrium pricing quantity just figure out the direction that we expect them to move so again this is just the initial equilibrium so we had p0 star and q0 star and now we want to know what happens to this equilibrium pricing quantity if the price of fuel goes down okay so how is the price of fuel related to this market well suppliers right remember suppliers use inputs in order to produce lobster one of those inputs in this case is fuel so when the price of fuel goes down that means it's cheaper to produce lobster so if it's cheaper then we would expect that at every possible price now suppliers would like to supply more to the market so that's a shift outward in supply or an increase in supply so if this is s sub zero then we could draw this as the shift out and supply sub 1. and again to find the new equilibrium pricing quantity we need to use the new supply curve and demand didn't move so we're still using the same original demand function and find that intersection to find the new equilibrium price which i'll call p1 star and quantity or q1 star and then finally we'd like to say how does this lead to changes or what does it lead to changes in the equilibrium price and quantity and yes it decreases the equilibrium price and increases the equilibrium quantity so in the next video uh we'll go over a few more examples of finding equilibrium um introducing some shock to supplier demand and then analyzing how that can change the equilibrium price and quantity in that market