Market equilibrium | Supply, demand, and market equilibrium | Microeconomics | Khan Academy
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Market equilibrium | Supply, demand, and market equilibrium | Microeconomics | Khan Academy


So, let’s say we are in the apple market. What I want to do in
this video is think about both demand and supply for the apples at different prices. Let’s draw ourselves a little graph here. We already know this right over here, the vertical axis is the price axis, and this we’re going to
say is price per pound. The horizontal axis this is the quantity. The quantity of apples. Let’s put some tick marks here. Let’s say that’s $1 a pound, $2 a pound, $3 a pound, $4 a pound, and $5, and let’s say this is
thousands of pounds produce and we have to set a period. Let’s say this is for the
next week, and so this is 1000 pounds, 2000, 3000, 4000, and 5000. Now, let’s think about
both the supply and the demand curves for this
market, or potential supply and demand curves. First I will do the demand.
If the price of apples were really high, and I encourage you to always think about this when
you are about to draw your demand and supply
curves. If the price of apples were really
high, what would happen to consumers? Well, they
wouldn’t demand much. The quantity demanded would be low. If the price were high, maybe the quantity demanded is like 500 apples. And once again I am
being very careful to say the quantity demanded is 500 apples. I’m not saying the demand is 500 apples. The demand is the entire relationship. The actual specific quantity, we call that the quantity demanded. The price of $5 of quantity demanded would be about 500. Maybe at a
price of $1, the quantity demanded would be maybe 4000 pounds. Our demand curve might
look something like this. Might look something like that. Let me draw it a little bit less bumpy. So, our demand curve might
look something like that. I can label it. That is our demand curve. I’ll think about our supply curve. Well, there some price
below which we aren’t even willing to produce apples. Let’s say that’s like 50 cents. So at 50 cents that’s where
were even just willing to start producing apples. Let’s say if apples …
if the price of apple got to a dollar where the
quantity we’ve be willing to supply is about a 1000 pounds, and it just keeps increasing
as the price increases. So this is the supply curve, and when I talk about we, I’m talking about all the suppliers in this market. We could be doing this
for a specific supplier. We could be doing this
for a specific market. We could be doing for
the global apple market. However, you want to view it, but for the sake of this video let’s
just assume its like our little town that is fairly
isolated and all of that. Let’s think about what happens
in different scenarios. What happens if the
suppliers of the apples going into that week for their
own planning purposes … They just think for whatever
reason, that their only going to be able to sell the
apples at $1 per pound. Given the supply curve, they
only supply 1000 pounds. This is what the suppliers plan for, and this is where they
set the price point at $1. One dollar per pound. Now, what’s going to happen in that scenario?
Well in that scenario they supplied 1000. The quantity
supplied is 1000 pounds. Let me write this down.
So, I’ll do it in pink for this scenario. So,
this scenario the quantity supplied is 1000 pounds. What is the quantity
demanded? Quantity demanded. This is all the scenario where
the price … the price or the initial price that the
growers or producers set was $1 per pound. One dollar per pound. Well the quantity demanded
at $1 per pound is 4000 pounds of apples.
4000 pound of apples. What do we have here? Well, here we have a shortage. We have a shortage of 3000
apples at that price point. At a dollar, a lot more people
are going to want to buy apples, and the producers just didn’t … I guess they didn’t figure that out right. They didn’t produce enough apples. Now what will naturally start happening? If you have the shortage
… you have all these people who want to buy apples, and you only have so many apples there, what might happen in the
next period in the next week? Well, first of all,
those apples that are out there they might get bid up,
so, the prices start going to start going up. The
prices are going to start going up. People are
going to start bidding up the apples. They want them so badly. Their going to start bidding them up, and as they start getting
bid up, the producers are going to say, “Wow!
There’s so many people are running out of apples.
We also need to increase the quantity produce.” The quantity will also go
up. The price will go up. If you look at from the
suppliers point of view. The price will go up, and
the quantity will go up. They will move along this line there. So maybe in the next period
there’s less of a shortage, or they move away from
that shortage situation. If the price and quantity
increase a little bit, so maybe the price goes
to $2, and the quantity goes to … I don’t know,
this looks like about 1900 … 1900 pounds,
now all of a sudden you have less of a shortage. I
think you see that I’m getting to an interesting point over here. I won’t go there just
yet. I won’t go there just yet. Let’s think
about another situation. Let’s think about after this happens. Price and quantity increases
so much that essentially overshoots this interesting
point right over here. So in the next week the
suppliers they’ll say, “Wow! People want our
apples so badly, let’s set the price really high at
$3, and at $3 we’re really excited about producing apples.” So, we the suppliers
are going to produce … let me do this in a
color I haven’t used yet. We the suppliers are going
to produce at $3 a pound. We are hoping to sell
3000 pounds of apples. This is where, maybe, they
adjust to the next week. What’s going to happen
there at a price of $3. That’s the scenario right
over here. The price of $3. So, the price is now $3 per pound. Well, now the quantity supplied
is going to be 3000 pounds. I could write 3000 pounds. What is the quantity demanded? The quantity demanded is now much lower. The price is high now,
because the consumers might want to go buy other things, or they can’t afford an apple,
or whatever it might be. Now the quantity
demanded, now that’s looks like about 1300. 1300 pounds. What situation do we have now? Well, now we have a much
bigger supply then … or the quantity supply is
much bigger than the quantity demanded. Now we face a surplus. So, now we have a surplus. Let me draw that line
there. I want to make it clear this is all the same scenario. We now have a surplus of … what is this? 700 will get us to 2000.
We have a surplus of 1700 pounds of apples. Now what happens in a surplus situation? Well,
apples won’t stay good forever, so maybe the
producers get a little desperate. They start selling. They start reducing the price,
maybe to start attracting some consumers. They
start reducing the price. When they start seeing that
the prices are going down, and you have this glut of
apples, there’re all going bad and not getting sold, the
quantity is also going to start going down.
They’ll produce fewer and fewer apples, so we’ll move
here along the supply curve. As you decrease the price, what’s going to happen to the demand curve? Well the demand is going to go up. Over here the prices was too high, so it’s natural for the sellers
to lower the price. When you lower the price it
also reduces the quantity. We go this way. When you lower the price
it increases demand. You go that way. If the price from the get-go were too low, then you have this huge
shortage, things get bid up. The prices go
up. As the price goes up, the suppliers want to produce more. They move up the curve.
As the price goes up then the people will demand less. You see that’s it’s all
converging on a point right over here where
the two lines intersect. Let me do that in a … its all
converging right over there. That’s the price at which the
quantity supplied will equal the quantity demanded. We
call this, which looks like for this scenario, maybe about $2.15. Let me just write it there $2.15. We call that the equilibrium price. Equilibrium price is $2.15 a pound. It’s the price at which
the quantity supplied is equal to the quantity demanded. This quantity supplied
is equal to the quantity demanded. That’s the equilibrium quantity. That right over here looks like it’s right about … I don’t know … 2200 pounds. 2200 pounds. Assuming that nothing
else changes, this is a good scenario for both
the consumers and the producers. They keep producing 2200. They charge this price,
and everything’s happy. All the apples get sold
and none of them go bad.

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