hello everyone welcome to business school 101 imagine you're at your favorite coffee shop ready to grab your daily caffeine fix but today something's different the price of your favorite latte has gone up you might wonder why the answer lies in the forces of supply and demand the Invisible Hand That guides prices in markets around the world so what exactly are supply and demand how do they work together to determine prices what is market equilibrium and how can we understand these Dynamics through graphs in this video I will explore these questions with you section one the law of demand let's start with the law of demand simply put demand is the quantity of a good or service that consumers are willing and able to purchase at various prices the law of demand states that all else being equal when the price of a good increases the quantity demanded decreases and when the price decreases the quantity demanded increases it's a simple but powerful concept that reflects human behavior for example imagine you're shopping for apples at the grocery store if the price of apples suddenly doubles you might decide to buy fewer apples or switch to a cheaper fruit like bananas this reaction is what we call a decrease in quantity demanded conversely if the price of apples drops you're more likely to buy more apples or stick with them instead of choosing another fruit this relationship between price and quantity demanded is usually represented by a demand curve which slopes downward from left to right the downward slope illustrates that lower prices lead to higher quantities demanded and higher prices lead to lower quantities demanded section two the law of supply now let's flip the coin and talk about the law of supply Supply refers to the quantity of a good or service that producers are willing and able to sell at various prices the law of supply states that all else being equal when the price of a good increases the quantity supplied increases and when the price increases the quantity Supply decreases for example think of a bakery that sells cupcakes if the price of cupcakes Rises the bakery is more likely to bake more cupcakes to maximize profits but if the price drops the bakery might cut back on production or even stop making cupcakes altogether because it's no longer profitable the supply curve therefore slopes upward from left to right this upward slope shows that higher prices encourage producers to supply more of a good while lower prices discourage production section three market equilibrium now that we've covered the basics of supply and demand let's talk about what happens when these two forces meet in the marketplace the point where the supply curve and demand curve intersect is called market equilibrium at this point the quantity of a good that consumers want to buy equals the quantity that producers want to sell the price at which this happens is known as the equilibrium price and the quantity is the equilibrium Quant quantity for example let's go back to our coffee shop suppose the shop finds that at $3 per cup they sell exactly 60 cups of coffee a day the same number they are prepared to make in this case $3 is the equilibrium price and 60 cups is the equilibrium quantity the shop is happy because they sell all their coffee without waste and customers are happy because they can get their coffee at a fair price if the price were higher than $3 say $4 the quantity supplied would exceed the quantity demanded the shop would have excess coffee that nobody wants to buy this situation is called a surplus on the other hand if the price were lower than $3 say $2 the quantity demanded would exceed the quantity supplied leading to a shortage customers would be left without their morning coffee and the shop would miss out on potential sales in both cases Market forces push the price back toward equilibrium surpluses Drive prices down as producers try to sell off excess stock while short bries Drive prices up as consumers compete to buy limited Goods this self-correcting nature of markets is one of the reasons why the concept of supply and demand is so powerful section four shifts in demand and Supply the supply and demand curves we've discussed so far assumed that all other factors remain constant but in the real world things change when something causes the demand or Supply to change other than the price of the good itself we see a shift in the demand or supply curve number number one shifts in demand a shift in demand means that at every price consumers now want to buy more or less of the good than before when demand increases the demand curve shifts to the right the green dashed line when demand decreases the curve shifts to the left the orange dashed line for example suppose a popular celebrity endorses a particular brand of sneakers suddenly everyone wants to buy those sneakers even though the price hasn't changed this increased demand causes the demand curve to shift to the right leading to a higher equilibrium price and quantity conversely if a Health Report comes out saying that eating too much sugar is bad the demand for sugary drinks might drop Shifting the demand curve to the left number two shifts in Supply a shift in Supply means that at every price producers are willing to supply more or less of the good than before an increase in Supply shifts the supply curve to the right the green dashed line while a decrease shifts it to the left the orange dashed line for example imagine a technological breakthrough that allows Farmers to grow wheat more efficiently this would increase the supply of wheat Shifting the supply curve to the right as a result the equilibrium price of wheat would fall and the quantity sold would rise on the other hand if a natural disaster destroys a large portion of the wheat crop the supply curve would shift to the left raising prices and reducing the quantity available in the market section five real world applications of supply and demand the principles of supply and demand aren't just theoretical they have real world applications that impact our daily lives example one housing market in cities where more people want to live than there are homes available the demand for housing exceeds the supply this situation drives up home prices and rents in response developers might build more homes increasing Supply but this takes time understanding supply and demand in the housing market helps explain why some cities are more expensive to live in than others example two gasoline prices when oil prices rise due to geopolitical tensions or supply chain disruptions the supply of gasoline decreases as a result gas prices at the pump go up conversely if new oil reserves are discovered or production increases the supply curve shifts to the right and gas prices may fall section six summary to sum up the forces of supply and demand are the backbone of market economies they determine the prices we pay for goods and services how much of these goods and services are produced and who gets to enjoy them by understanding how supply and demand work you'll be better equipped to make informed decisions as a consumer a business owner or a policy maker all right that's all for this topic if you have any questions or thoughts feel free to leave a comment below if you find this video helpful please give it a thumbs up and subscribe to our Channel thank you for watching and see you in the next session