Changes in Market Equilibrium How the equilibrium price or quantity might change due to changes in supply or demand
Changes in Market Equilibrium
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- What I want to do in this video is how supply and / or demand might change
- based on changes on some factors of the market
- and then think about what that might do to the equilibrium price and equilibrium quantity.
- So let's say at some period, this is what the supply curve looks like,
- and this is what the demand looks like
- and then all of a sudden this thing happens.
- A new disease resistant apple is invented what's likely to happen for the next period?
- Well a new disease resistant apple being invented,
- this is something that clearly impacts the growers and clearly impacts the suppliers.
- All of a sudden you'll have fewer apples vulnerable to disease
- and so they will be able to produce more apples,
- so at any given price point this will shift the quantity of apples supplied up,
- or you could say that entire supply curve is shifted to the right or supply goes up,
- and obviously, if now we have disease resistant apples
- even our minimum price of producing apples is lower.
- Now, when we have supply curve shifted this way, shifted to the right
- what happens to the equilibrium price?
- Well our old equilibrium price was over here,
- our new equilibrium price..so this is old one
- and this is our new equilibrium price,
- we're assuming that the demand has not changed at all
- so this is our new equilibrium price
- so our new equilibrium price is lower, so the price went down.
- And you don't have to, you could've probably reason through that before taking an e-class
- But this way you have some way to think about it,
- think about how the curves are changing.
- Now let's think about this scenario.
- So this is before, so all of these examples, this is the graph is what happened before.
- the event came out, so this is before
- and the studies release on how apples prevent cancer. So what is that likely to do?
- Well no one want cancer
- and more people would be eager to have apples,
- this will change customer preferences.
- they will prefer apples even more when they're..when they're at the supermarket.
- So this is clearly affecting demand customer preferences
- and at the given price customers will want to get,
- people will demand higher quantity of apples,
- quantity demanded of the apples would go up.
- So the demand curve will shift to the right, or you could say that demand would go up
- so that's the new demand curve, so here the demand goes up,
- and let me write over here in this situation supply went up,
- here demand goes up, and what happens to the price?
- This is our old equilibrium price
- and this is our new equilibrium price
- The price is clearly went up
- Actually over here, let's think about the quantity too in this first situation
- This is our old equilibrium quantity; this is our new equilibrium quantity
- Quantity went up which makes sense
- If you have fewer apples dying, price went down, more people want to buy it
- Here, price went up and what happened to quantity?
- Quantity. This is our old equilibrium quantity; this is our new equilibrium quantity
- Quantity also went up
- More people just want to buy apples; they don't want to get cancer
- Now let's think about these scenarios right over here
- The pear cider industry launches an ad campaign
- For the sake of this, let's assume the same growers who grow apples can also grow pears.
- That makes it interesting
- So you have a couple of interesting things
- By launching this advertising campaign -- we assume it's a good advertising campaign --
- this will clearly make demand go up for pear cider relative to apple cider
- Most people when they think of cider, they think of apple cider
- Now all of a sudden, pear cider comes out. It'll make demand for apple cider go down
- So this is, apple cider demand will go down
- If the apple cider demand goes down,
- the apple cider producers are going to demand fewer apples
- This means apple demand will go down
- At any given price point, apple demand will go down
- So the apple demand curve will shift to the left
- I should say at any given price point, the quantity demanded will go down
- so the entire curve, the entire relationship will shift to the left
- Now that is not all that might happen
- because if you think about it from the suppliers' point of view
- I don't know if this is really the case, but let's assume
- that the farmers who grow apples can also grow pears
- Well, they might say, well, now that there's more demand for pears
- they're doing this advertising campaign
- and probably the price of pears has gone up
- They might say, well, I'm going to devote more of my land to pears and
- less of my land to apples
- And so the apple supply might go down
- It also shift to the left. So they're both shifting to the left
- Now what is likely to happen here?
- The demand went down and the supply went down; they both shifted to the left
- Well, here the way I drew it.
- This was our old equilibrium price; this is our new equilibrium price
- It actually looks the way that I drew it right over here that it did not change
- The equilibrium quantity definitely
- This was our old equilibrium quantity; this is our new equilibrium quantity
- Clearly the quantity went down. It was a bad day for apples
- but the price didn't change because at least in the example
- we assume that the farmers also produced fewer apples
- It turns out that I can have drawn it in multiple ways. Let me draw it in different ways here
- So the quantity definitely--
- So let's think about other scenarios. Let me draw it slightly different
- Let's say that the supply goes down even more dramatically
- Let's say that the supply shifts all the way
- the supply shifts really far back. Now what happens?
- Well now our equilibrium price
- because the reduction in supply was more extreme than the reduction in the demand
- Now -- and it really depends on how the curve shapes and all that
- The main thing is to reason through so as to see what the actually results are
- but in this situation, all of a sudden, the price went up,
- but the quantity definitely still went down
- So in this case, the one thing that you're always going to be sure
- is that the quantity went down but the price went up because this effect
- The supply went down much more than the demand did. So the price went up
- Now I could have done another scenario where maybe
- the supply barely barged or maybe the demand went down dramatically
- Let me draw it where the supply barely barges
- So maybe the supply, it only gets shifted a little bit to the left
- So maybe the supply curve looks like this
- Now all of a sudden, quantity definitely goes down
- So in all of the scenarios, the quantity will go down
- But I've just done 3 scenarios where the price could be neutral,
- the price could go up or the price could go down. So you actually don't know
- what is going to happen to price based on this
- You'd actually have to look at the actual curve and see what the new equilibrium prices are
- Now let's look at this. The apple pickers unionize and demand wage increases
- So this is an issue for the suppliers
- So all of a sudden, one of their inputs, one of the costs of production
- which is labor has gone up
- So the cost of production has gone up
- Now at a given price point, they're less profitable
- less willing to produce apples
- So at a given price point--so we're talking about the suppliers
- at a given price point they will supply a lower quantity
- So this is going to lower supply
- When you lower supply, what's going to happen?
- Well your equilibrium quantity, this was our old one, this is our new one
- equilibrium quantity definitely goes down
- And what happened to the price, assuming nothing changes to the demand?
- So this was our old equilibrium price; this is our new equilibrium price; it went up
- Quantity went down and price went up
- I encourage you to--I should've told you at the beginning to try these for yourself
- but I encourage you to try these out with different situations
- Think of situations yourself
- and even think about different markets other than the apple market
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