hi everyone so from my previous video we've understood what the functions of the price mechanism are and how they work in this video we want to apply those same functions to when demand and supply curve shift let's start by looking at a demand curve shifting to the right now we know what all the factors are that can do this we've learned them as specific factors but when we covered those factors we said they're all non-price factors that shift the demand curve meaning when this demand curve is Shifting to the right it's shifting at the initial price in the market which in this case is P1 so our job always when a curve is Shifting is to find the disequilibrium which will always exist when a curve is shifted so in this case demand is shifted right but it's shifted at the initial price of P1 so extend P1 across to find the new demand which is all the way over here call it QD where supply has remained at q1 so demand is greater than Supply this is an excess demand this is a shortage that's the disequilibrium once you've found that should be easy to understand how the functions of the market will take this away will correct this problem because we covered that in my previous video but let's do it again so in reality firms are going to be seeing large cues of people desperate to buy this good or service they'll be long waiting lists of people desperate to buy this good or service there could be competition between buyers right so it's clear firms are not able to supply the demand that's out there but also firms are seeing customers consumers who are bidding up their prices they are so desperate to buy this good or service so naturally what happens with prices prices rise we learned in my previous video that access Divan puts upward pressure on prices so on our diagram let's say the price rise is perfect from P1 to P2 in reality this will be numerous price Rises before we get to P2 but let's keep things simple and just go straight to P2 here at which point bam the functions of the price mechanism kick in we know that now at higher prices just think RC RC yes those functions kick into gear yes what happens first well higher prices signal the fact that there has been excess demand for both consumers and producers but also higher prices signal the need now for more more resources in this market higher prices incentivized firms to increase their output to make more profit of course now produce more you can sell more at a higher price what a way to make more profit we can show that function via an expansion along the supply curve or an extension along the supply curve so this could be new firms entering the market this could be existing firms increasing output by investing in new capacity or using up spare capacity but there we go that is the incentive function higher prices also ration scarce resources in this case by discouraging consumption we can show that via a contraction along the demand curve put those last two effects together where do we end up we end up with quantity Q2 which is at equilibrium which we know is allocative efficiency awesome awesome right so we've achieved allocative efficiency we've achieved equilibrium the reallocation of resources is now with a higher quantity at higher prices that's how markets work when we have an increase in demand demand shifting right how do we get from P1 q1 to a new equilibrium all sorted thanks to RC let's do the same thing for a supply shift to the right once more we know what all these factors are we've learned them as pints WC factors and again these are all non-price factors so like before when the supply curve shifts it will shift at the initial price in the market in this case P1 we need to find the disequilibrium once we find that we can rock it forward from there so with the supply shift to the right that's happened at P1 extend that price line across to get the supply which is now over here at Qs the demand has remained at q1 Supply is greater than demand this is an excess Supply this is a surplus at this point again we should know how this is going to be self-corrected but let's go through it to make sure there's full proof understanding so what a firm is going to be seeing with an excess Supply with a surplus their warehouses are going to be full of stock physical stores are going to be full of stock on the shelves if you're a restaurant your tables are empty your kitchen is full of ingredients right at which point prices naturally fall yes covered that in the last video didn't we and we know that excess Supply surpluses put downward pressure on prices again let's say it's a perfect price for from P1 to P2 in reality it will be numerous price drops before we get to P2 but let's keep things simple here at which point bam RC the functions of the price mechanism kick in yes they do and that's how we can end up at this new equilibrium what happens first well lower prices first signal signal that there has been an excess Supply to both consumers and producers but they also signal the need for fewer resources less resources in this market lower prices incentivize producers to reduce output instead liquidate stocks sell your stocks that's the way to increase profit by cutting output and liquidating stocks we can show that effect via a contraction along the supply curve so what's happening here this could be firms leaving the market or existing firm's cutting capacity reducing output that way that's the incentive function at the same time lower prices ration scarce resources in this case by encouraging more demand the expansion or the extension along the demand curve shows that effect put those last two effects together where we ended up We've Ended up at a new quantity Q2 wonderful this is at equilibrium we know equilibrium is allocative efficiencies like magic row these functions of the price mechanism are magical things absolutely lo and behold equilibrium allocative efficiency excess Supply completely taken away incredible to see this in reality like this we've done it the functions of the price mechanism how they work in getting from one equilibrium to a new equilibrium we've done it for a demand shift to the right and a supply shift to the right there are two shifts left though aren't there demand shifting left Supply shifting left I'm going to leave that to you guys what a nice exercise for you to do to see whether you really get it it should be very simple because there are only two disequilibrium aren't there an excess demand or an excess Supply we've covered both here you just have to find that and go forward use this video use the previous video to make sure you can get that nailed on but that is fascinating stuff you might say magical stuff for you guys seeing markets in action thank you so much for watching can't wait to see you all in the next video foreign