Hey Econ Students, this is Jacob Clifford. I made this video for one reason, to save you time. In an economics class, your teacher or professor is going to expect you to be able to use supply and demand, not just know supply and demand. So I made this video to bridge that gap between introduction and application.
as fast as possible. Now do me a favor, don't take any notes as you watch this video the first time through, just understand the concepts, and then later if you need to come back and take notes. So here we go, everything you need to know about supply and demand in less than eight minutes.
Okay, let's start off with demand. This is a demand curve and it it shows the inverse relationship between price and the quantity that consumers are willing and able to buy, so the quantity demanded. When the price goes up, the quantity demanded falls. When the price goes down, the quantity demanded increases and people wanna buy more. There's three reasons for the law of demand.
The first one is the substitution effect. When the price goes up for ice cream, people substitute away from ice cream and go buy other products like candy bars. And if the price falls for ice cream, people substitute away from candy bars and start buying more ice cream. The second reason is the income effect.
When the price goes up for ice cream, people are gonna buy less ice cream because they have have less purchasing power. They can buy less ice cream. And when the price falls for ice cream, the quantity demand is going to increase because people can buy more ice cream. Each dollar buys more ice cream than before.
The third reason is the law of diminishing margin utility. As you consume more and more ice cream, you get less and less additional satisfaction or happiness from it. So the price has to fall to increase the quantity that people are going to buy. So if you already bought one ice cream cone to get you to buy another one, they've got to lower the price.
That shows you an inverse relationship between price and quantity and the law of demand. Now, notice when there's a change in Imagine the price that moves along the demand curve, but what if something else changes that causes the demand curve to shift? There's five shifters or determinants of demand that cause the demand curve to increase and shift to the right or decrease and shift to the left. The first one is taste and preferences.
For example, if it's 100 degrees outside, then the demand for ice cream would shift to the right. But notice, we're not talking about a change in the price of ice cream. The price is staying the same.
It's some other factor that's causing demand to go up. People are buying more because it's a hot day outside. And if it was a cold day outside, at every single price, people would buy less because they don't wanna buy ice cream because it's freezing.
I'm good, we're good. The second shifter is more consumers. So more consumers would increase demand, less consumers, less buyers would decrease demand.
The third shifter is the price of substitutes and compliments. Notice this is not the price of ice cream. This is the price of some other good like candy bars. Candy bars and ice cream are substitutes. So if the price goes up for candy bars, people are gonna buy more ice cream and the demand curve is gonna shift to the right.
But ice cream and ice cream cones or not substitutes, they're compliments. So if the price goes up for cones, that's gonna cause the demand to go down for ice cream. Again, we're talking about the price changing, but not the price of ice cream, the price of some different product that's related to ice cream. The next shifter is income, and it depends on the type of product because there's normal goods and inferior goods.
A normal good is when income goes up, people buy more of it, and when income goes down, people buy less of it. But an inferior good is when income goes up, people actually buy less of that product, and when income goes down, people would buy more. Ice cream is probably a normal good, but Top Ramen is an example of an inferior good.
When incomes go down, people actually end up buying more of it. The fifth and final shifter of demand is a change in expectation. So if you expect prices to go up in the future, maybe the demand will increase now.
So there we go, that's the five shifters of demand. And notice the price of ice cream is not on that list. Price moves along the curve. These shift the curve.
Okay, okay, we got that. Let's keep going. Now let's switch over to supply.
Now this is a supply curve. It shows a positive relationship between price and the quantity supplied. The reason for this has to do with making profit. If the price is low for ice cream, producers don't want to produce very much because they're not going to make very much money. If the price goes up, they're going to want to produce a whole lot more because they're going to make more profit.
So again, a change in the price of ice cream moves along the supply curve, but there's also five shifters of supply. The first one is a change in the price of resources or inputs to produce ice cream. For example, if the price of milk goes up, that's going to cause the supply to decrease. Now notice here, a decrease in supply was a shift to the left. So just like demand, an increase is to the right, a decrease is left.
Now, if the price were to fall for some resource of producing ice cream, then the supply would shift to the right and that would be an increase. The second shifter of supply is a change in technology. So if there's a new machine that produces ice cream faster and cheaper, that would cause a supply curve to shift to the right. The third shifter is some sort of action by the government, so subsidies or taxes or some sort of regulation.
So a tax on ice cream producers would cause the supply to decrease and shift to the left. A subsidy if the government gave them more money to produce more, that would shift it to the right. And some sort of regulation, like limiting the amount of ice cream we could produce, would decrease the supply.
The fourth shifter of supply is number of sellers. So if there's less sellers, supply will shift to the left. If there's more sellers, there's more supply, and it shifts to the right. And the fifth and final shifter of supply is a change in expectations.
If producers think the price is gonna go up for ice cream in the future, maybe they'll hold back supply now and wait to go sell it later. Okay, there we go. Those are the five shifters or determinants of supply showing you why a supply curve might shift to the right or left. But notice, the price of ice cream is not on that list because price does not shift the curve.
Don't forget, price doesn't shift the curve. Yarrr! Thank you!
Now we finally have enough to put some and demand together. We've got a demand curve, now here comes the supply curve, and we can find equilibrium. Economists call this the market clearing price. It's the only price where the quantity demanded equals the quantity supplied.
And if there's a change in the price for ice cream, that moves along the demand and the supply curve. changing the quantity demanded and the quantity supplied. This is called disequilibrium. For example, the price is down here, the quantity demanded is greater than the quantity supplied, and that is a shortage. At this low price, consumers wanna buy a whole lot of ice cream, but producers don't wanna produce very much, and there is a shortage.
But if the price goes up here, the coin supply increases, producers want to produce a lot, but at the high price, consumers don't want to buy very much. That means there's a surplus. But really, in a free market, there's no reason for the price to stay up there.
If prices are too high, eventually producers are going to start lowering the price, and that'll put us back at equilibrium. And if prices were too low, then consumers would bid up the price of those products until eventually it reaches equilibrium. The point is, unless the government's involved in controlling prices, just assume we're at equilibrium in a free market.
All right, now I'm excited. Now we have supply, demand, equilibrium. we can start using that to find out what's going to happen to price and quantity.
Okay, here we go. We've got demand and supply at equilibrium. Let's say there's a study that comes out that says ice cream makes you smarter. How is that going to affect the price and the quantity of ice cream? Well, people prefer to be smart, and that means that's going to increase the demand, shifting it to the right, so the price and the quantity is going to increase.
But if some study said that ice cream actually makes you dumber, that would decrease demand, causing the price and the quantity to fall. But what if instead there was some machine that could produce ice cream... quicker and cheaper, that would increase the supply because it's affecting production, price would go down, quantity would go up. But if instead we ran out of milk and the price of milk increased, then the supply for ice cream would decrease, price would go up, and quantity would go down.
And that's it. It seems like a lot, but there's really only four shifters or four things that can happen. Demand can go up, demand can go down, supply can go up, or supply can go down.
And in each case, the equilibrium price and quantity changes, but you don't need to memorize it. Just draw the graph. When in doubt... draw it out.
Okay, that's it for supply and demand. There's several things I didn't cover. For example, price controls, when the government controls the price, ceilings and floors, or double shifts, but I have videos that cover those concepts. And if you're in macroeconomics, you're gonna take what you learned about supply and demand in a market and apply it to the entire economy when you look at aggregate demand and aggregate supply.
And if you're in a microeconomics class, you're gonna learn about elasticity. It looks at the shape of the supply and the demand curve. The point here is you've got the basics, but there's a lot more stuff that you're gonna have to learn.
And most importantly, if the- to sit down and actually practice. So don't think just watching one video with me is gonna help you. You gotta sit down, practice different scenarios of shifting demand and supply.
And of course, if you need more help practicing, take a look at my ultimate review packet. And if you're a teacher, take a look at my economics worksheets. Thank you so much for watching my videos. Make sure to subscribe.
Until next time.