Hey Econ students, this is Jacob Clifford. Welcome to the Microeconomics Unit 2 summary video. In these summary videos, I explain all the concepts that you need to know for your next quiz, unit exam, or final exam, basically everything you need to get an A in the class. But remember this is a summary video so I'm going pretty quick. If you need more help take a look at my other videos on YouTube. This video is going to cover Unit 2: Supply and Demand. Before we jump into it make sure you have the study guide that goes along with this video. So right now pause this video and download and print the steady guide. Let's start with a quick overview. Here are the five big-picture ideas you need to know for this unit. #1: The law of demand shows a negative relationship between price and quantity demanded and the law of supply shows a positive relationship between price and the quantity supplied. #2. Elasticity measures the responsiveness of one economic variable to a change in another. #3. Consumer surplus, producer surplus, and deadweight loss are used to analyze the efficiency and welfare effects of a market. #4. A demand and supply graph shows the equilibrium price and equilibrium quantity and can be used to predict and analyze changes in a market. #5. The effects of government intervention like taxes, subsidies, tariffs, and price controls can be analyzed using supply and demand. That's an overview, so now let's jump into specific topics. You learn this in your class. It all starts off with some basic definitions. Demand is the different quantities the consumers are willing and able to buy at different prices. And there's the law of demand. It shows an inverse relationship between price and the quantity demanded. If the price goes up, the quantity people want to buy is going to fall. If the price goes down people are going to want to buy more. Now there are three reasons for, or causes of, the law of demand. The first is the substitution effect. It's the idea that people buy fewer units when the price goes up because they go buy a substitute instead. And when the price falls, they buy more because the product is now relatively cheaper than other substitutes. The income effect is the idea that people buy fewer units when the price goes up because they have less purchasing power. Their money doesn't go as far so they're going to buy less. And when the price falls, people purchase more because they can buy more. And the third reason for the law demand is the law of diminishing marginal utility. "This is worth at least 50 utils" As more units are consumed the price that consumers are willing to pay is going to fall because people get less and less additional satisfaction from each additional unit. This is a demand schedule for a market and it shows the different quantities that consumers are willing and able to pay at different prices. And it shows the law of demand. When the price is lower, consumers are willing able to purchase more. A market demand schedule is made up of individual demand schedules showing the preferences of specific people. And, each are subject to the law of demand. This law is shown on a graph with a downward-sloping demand curve. If the price falls, more people will be willing and able to buy. If the price goes up, less people will be willing and able to buy. So a change in the price of the product moves along the demand curve, but if something else other than the price changes that could cause the demand curve to shift. For example, if there's suddenly more consumers in the market. That would cause the demand curve to shift to the right so at every single price people are willing and able to buy more. But if it was found this product gets people sick, then the whole demand curve would shift to the left. At every single price people will be willing and able to buy less. Now there are five shifters, or determinants, of demand. There's taste and preferences, number of consumers, price of related goods (substitutes and compliments), income, and future expectations. And there are a few details here. For the price of related goods, remember the difference between substitutes and complements. Substitutes are goods and services that can be used in place of each other, and complements are goods and services that are used together. For income, remember the difference between normal goods and inferior goods. For normal goods, when income increases then the demand increases. For inferior goods, when incomes go up the demand falls. An example is Top Ramen. When there's a recession and incomes are falling people actually might be buying more. The best way to make sure you understand those shifters is to practice, so here we go. What happens to the demand curve for milk if the price of milk falls? Nothing The demand doesn't shift. Remember a change in the price of the product moves along the curve. Just remember price doesn't shift the curve. "don't forget, price doesn't shift the curve! yeah thank you." Okay, new question what happens to the demand curve for milk if the price of a substitute falls? This would cause the demand for milk to decrease and shift to the left. At every price, consumers are willing and able to buy less because the price of a substitute has fallen. They're going to buy the other good instead. Now you might be thinking to yourself, whoa, whoa, whoa, you just said price didn't shift the curve and all in the price of the substitute that caused the curve to shift. Yes, a change in the price of the product doesn't shift the demand curve but this is talking about a change in the price of a different product, a substitute. To clarify, a change in the price of the actual product moves along the demand curve, and that's called a change in quantity demanded. If one of those five shifters change, that's a change in demand. It seems like the same thing, but trust me I guarantee your teacher is going to ask you a question about that. All right! That's it for demand. Let's make sure you're getting it. Pause this video and fill out topic 2.1 in your study guide. Now all of this also applies to the supply curve Supply is the different quantities that producers are willing and able to sell at different prices and there's also a lot of Supply showing a direct relationship between price and the quantity Supply when the price goes up producers want to produce more when the price goes down producers are going to produce and sell less this is because when the price goes up producers are going to make more profit so they want to sell more when the price goes down eh I'm going to sell less because why bother so that means there's an upper sloping supply curve which also has its own shifters the price of resources or inputs the number of producers technology government intervention like taxes subsidies and Regulation and expectations of future profit again let's practice show what happens to the supply curve for milk if the price of milking machines increases milking machines are a key resource for producing milk so the supply of milk is going to shift to the left at every price milk producers are going to be willing and able to sell less milk that's it for Supply to make sure getting everything fill out topic 2.2 on your study [Music] guide before we put supply and demand together let's talk about elasticity for most students this is the hardest Topic in this unit because it does require you to do some math but don't freak out the general idea is pretty simple elasticity shows how sensitive quantity is to a change in price in other words we know that an increase in the price is going to change the quantity demanded and the quantity supplied but how much is it going to change will the quantity change a lot or just a little that's the idea of elasticity there are four types of elasticity and four equations that you have to know price elasticity of demand price elasticity of supply cross price elasticity of demand and income elasticity of demand the price elasticity of demand measures how sensitive quantity demand it is to a change in price the equation is the percent change in quantity divided by the percent change in price your teacher Professor very rarely is going to give you the percent change so that means you have to be able to calculate it given the raw numbers the good news is that I have a trick for you whenever you see questions that require you to calculate percent change remember to say no no no o it's the new number number minus the old number divided by the old number times 100 so if the price decreased from $15 to $12 the percent change is 12 - 15 / 15 * 100 so - 20% now if that 20% decrease in the price resulted in a 60% increase in the quantity the demand would be relatively elastic remember if the absolute value of the price elastice to demand is greater than one then the demand is relatively elastic meaning quantity is very sensitive to a change in price if that coefficient is less than one then the demand is relatively inelastic meaning quantity is less responsive to a change in price a coefficient of one means it's unit elastic so the percent change in quantity and the percent change in the price are the same and if it's zero the demand is perfectly inelastic meaning consumer is going to buy the same amount even if the price goes up notice the more inelastic the demand the more steep the demand curve but elasticity is not the same as slope in other words a demand curve with a constant slope can have a different elasticity depending on where you are at higher prices and lower quantities the demand is generally more elastic and at lower prices and higher quantities the demand tends to be more inelastic and different products have different elasticities it all comes down to the availability of substitutes the necessity of the product the proportion of income spent on the good and the time period considered now there's one more thing you have to learn about the elasticity of demand it turns out that this equation is not the only way to determine the elasticity of the demand curve the other way is called the total Revenue test it involves looking at the total revenue before and after the change in price for example if the price is $20 and the quantity demanded is 10 then the total revenue is2 200 if the price Falls to $15 causing the coin demander to increase to 20 then the total revenue is $300 this means the demand curve in that range is relatively elastic you could calculate percent change and do it the other way but you don't have to the total revenue test says that demand is elastic if the price Falls and total revenue goes up or if the price price goes up and the total revenue Falls and the demand is inelastic if the price Falls and total revenue Falls or if the price goes up and the total revenue goes up but remember the total revenue test only works for demand it doesn't work for Supply now I threw a lot at you so it's time to practice take out your study guide fill out topic 2.3 good luck if you understood price elasticity of demand then you'll definitely understand price elasticity of supply it measures how sensitive quantity supplied is to a change in price and the equation is almost identical and just like demand if the coefficient is greater than one then Supply is relatively elastic if it's less than one then Supply is relatively inelastic and if it's equal to one then it's unit elastic and things like paintings by Van go are actually perfectly inelastic the quantity Supply is not going to change even if the price goes up so different products have different elasticities of Supply it all comes down to how difficult it is to produce the product for example products with few sellers or specialized inputs or that require a long time to produce have more inelastic supply quantity supplied is less sensitive to a change in price but if the product's relatively easy to produce and a small change in price can lead to a huge change in the quantity suppli I think you get it go ahead and fill out topic 2.4 on your steady guide there are two more types of elasticity and two more equations that you need to know cross price elasticity of demand measures how sensitive the quantity demanded of what product is to a change in the price of a different product if the coefficient is positive then the two goods are substitutes if it's negative then the two goods are complements income elasticity to demand measures how sensitive quanti demand it is to a change in income if the coefficient is positive then that's a normal good if it's negative it's an inferior good now be careful here when we did elasticity of demand we kind of ignored the sign we looked at the absolute value but when you're doing cross price and income elasticity the sign really matters makes you know if it's positive or negative the point is read these questions carefully to see if the price or income increased or decreased and indicate if the percent change is a positive or A negative it's those small details that might trip you up on your exam and it's why it created a different resource to help you practice there's an elasticity practice sheet inside unit 2 in my ultimate review packet it's designed to help you practice the equations to make sure you're getting it it's free you can download it and do those questions after you're done watching this video but right now it's time to pause and fill out topic 2.5 in your study guide [Music] now it's time to put supply and demand together so right here is the equilibrium price and quantity this is the only price where the quantity demanded equals the quantity supplied and we assume that's where we're going to be in a competitive market when the price is too high and above equilibrium then there's a surplus and eventually prices will fall because sellers have all these extra units they're going to lower the price so people will buy them and when the price is below equilibrium and there's a shortage eventually prices will go up because consumers will bid up those prices the point is always assume we're at equilibrium unless something weird is going on in the market which we'll learn about later in this unit economists look at the efficiency of a market by looking at the benefits it provides to buyers and sellers consumer surplus is the difference between what consumers are willing to pay the demand curve and the equilibrium price producer Surplus is the difference between the price and how much sellers are willing to sell goods for now remember not only do you have to find these on the graph you also have to be able to calculate them it's relatively easy it's just the equation for a triangle 1/2 base time height now when you put cons consum Surplus and producer Surplus together that gives you total Surplus and when this is maximized the market is efficient buyers and sellers are getting as much benefit as they can at this socially optimal quantity but what happens when we produce less and we're over here well then we end up with dead weight loss which is loss consumer and producer Surplus and an inefficient market and remember it can be on either side if we produce too little we end up with dead weight loss right here and if we produce too much we end up with dead weight loss right here we're going to come back to this idea later in this unit and in future units for now it's important for you just to be able to spot and calculate consumer surplus and producer Surplus which is why you should stop pause the video and fill out topic 2.6 on your study Gap topic 2.7 starts by going back and looking at the idea of dise equilibrium just remember when the price is above equilibrium the quantity supplied is greater than quanti demanded so there's a surplus and when the price is below equilibrium the quany demanded is greater than the quany supplied and 's a shortage a good way to remember that is the price is low it's short so there's a shortage probably the most important skill in this unit is this next part showing changes in a market you want to talk about a supply and demand problem I sell ice for a living when it comes to these questions there's Three Steps step one is draw supply and demand and label the original equilibrium price and quantity step two is analyze the change is it going to affect Supply or demand what's the shifter draw and label that new curve and don't forget to draw an arrow and step three is the most important one identify the new equilibrium price and quantity and say what happened did price go up or down did quantity go up or down and remember that's what we're doing here we're trying to predict what's going to happen when there's a change in the market what's going to happen to price and quantity o that's a rough business to be in right now I mean that is really that's unfortunate let's practice draw a market for ice cream and show what'll happen if the price of cream and input significantly decreases you start with a graph showing the original equilibrium we're analyzing ice cream and the price of an input fell so that's going to affect the supply the supply is going to shift to the right so make sure to draw and label that and have an arrow now label the new equilibrium price and quantity and the bottom say price went down and the quantity went up now I know it seems like there's a lot going on here but remember there's only four things that can happen demand can increase demand can decrease Supply can increase or Supply can decrease it's easy except when there's double shifts sometimes you might see a question that explicitly tells you that both demand and Supply shifted when you see that remember the double shift rule when two curves shift at the same time either price or quantity is going to be indeterminate in other words you won't be able to tell it could go up or it could go down let's practice assume you have a question that says the demand's going to fall and the supply is going to fall what's going to happen to price and [Music] quantity to get the answer just draw the grass Remember When out graph it out a decrease in demand will cause the price to go down and the quantity to go down and a decrease in Supply will cause the price to go up and the quantity to go down so no matter what happens the quantity is definitely going to decrease the price might go up it might go down so that's the one that's indeterminate or your teacher might use the term ambiguous either way you don't know it might go up might go down you can't tell but remember this is only for double shifts when it comes to single shifts you know exactly what's going to happen either price goes up or down quantities going to go up or down double shifts something's going to be indeterminate at this point you definitely need to practice so let's see what you know take a look at topic 2.7 on your study guide good [Music] luck now here in topic 2.8 we're talking about how government intervention affects demand and Supply it all starts with the idea of price controls when the government artificially keeps prices above or below equilibrium this is the idea of a price ceiling or a cap on prices at first glance you probably thought it's going to help consumers cuz it keeps prices down but that also means producers are not going to produce as much stuff so we're going to end up with a shortage but the real question is can you spot consumer surplus producer Surplus and dead weight loss here they are consumer surplus producer Surplus and dead weight loss CU we're not producing the socially optimal quantity and this Market is inefficient the opposite of this is a price floor which keeps prices artificially High the government is saying you can't lower the price below a certain level the result is that consumers are worse off so here's consumer surplus and here's producer Surplus and again we have dead weight loss but like I said before being able to spot them is important you also have to be able to calculate them which you're going to do inside the study guide but watch out here teachers and professors love giving you a price ceiling or a price floor that's in the wrong spot for example your next Quiz or test we have a question where it says what happens when there's a price ceiling above equilibrium the answer is nothing it's not binding it has no effect it's like if the government told gas stations they can't sell gas for more than $200 a gallon no one's trying to do that so it's not going to affect the market just remember that price ceing are only binding if they're below equilibrium and price floors are binding when they're above equilibrium now let's take all these Concepts you learned and apply them to the idea of taxes a per unit tax on producers will cause a supply curve to shift to the left because producers now have higher costs that vertical distance is the amount of the tax per unit the result is that consumers pay a higher price but that's not the price that sellers receive remember the sellers have to pay that tax so this is the price that sellers receive because that vertical distance is the amount of the tax per unit now we multiply that tax times the quantity that gives you the total tax revenue that goes to the government let me explain that again in case you're confused before the tax all the money that consumer spent the total expenditures was equal to the total revenue the sellers received after the tax the total amount that consumer spent is here but sellers only got to keep this total amount because the rest went to the government does that make sense now you should also be able to spot and calculate consumer surplus produ a surplus and dead weight loss again I'm going to have you do the calculations inside the steud guide for now let's see if you can spot them try to find consumer surplus producer Surplus and debate loss after the tax after the tax consumer surplus is here producer Surplus is here if that original quantity is socially optimal then here is the dead weight loss there's one more thing you have to know about taxes it's the idea of tax incidence or who pays the tax notice that the tax increased the price the buyers had to pay but it also decrease the amount the sellers receive in other words both buyers and sellers share the burden of the tax the easiest way to spot it is identify how much that tax revenue dig into consumer surplus or producer Surplus for example if the demand is more inelastic than the supply then consumers pay a higher portion of that tax and if the supply is more inelastic than demand then producers pay a larger portion of that tax the big takeaway here is the burden of the tax and the amount of dead weight loss depends on the relative elasticity of the demand and Supply curves now I know I covered that fast if you need more help with seedings and Floors or taxes take a look at my videos on YouTube but if you can answer the questions in the study guide you totally understand it fill out topic 2.8 good luck okay there's one more thing we have to talk about it's international trade you know from compar advantage in unit one that countries benefit from trade and now we can show that using supply and demand this is a domestic market for sugar showing the equilibrium price and quantity if we produce sugar in our own country question what happens to the consumer surplus producer Surplus and dead weight loss if instead we can get sugar at a cheaper world price pause the video and see if you can figure it out at this price domestic producers will produce this amount but consumers want more so we're going to import the rest the total amount purchased is here so consumer surplus is this big triangle this is produ Surplus and there's no dead weight loss we actually have the opposite of dead weight loss we have more total Surplus because consumers benefit from international trade but notice who doesn't like International Trade domestic producers because producer Surplus got smaller and this is why domestic producers often Lobby policy makers to avoid international trade at least have some tariffs if there was a tariff of $10 then the world price would go up to $20 consumer surplus would get smaller the producer Surplus would get bigger and this is the Tariff Revenue that goes to the government and that tariff would cause dead weight loss which is these two triangles right here if you're still confused take a look at the international trade video I made on YouTube but right now let's see what you know fill out topic 2.9 on your study guide okay you're done with your study guide but you probably should still practice I suggest you go back to the ultimate review packet and do the multiple choice questions for this unit and fill out the practice sheet for elasticity trial those questions and look at the answer key to see if you got them right okay that's it for microeconomics unit 2 if this video helped you please like leave a comment and subscribe thanks for watching till next time don't forget ryson ship the carve yard