Course: AP®︎/College Macroeconomics > Unit 1Lesson 6: Market equilibrium, disequilibrium, and changes in equilibrium
- Market equilibrium
- Changes in market equilibrium
- Changes in equilibrium price and quantity when supply and demand change
- Lesson summary: Market equilibrium, disequilibrium, and changes in equilibrium
- Market equilibrium and disequilibrium
- Changes in equilibrium
Changes in market equilibrium
When supply or demand change, the price and quantity in the market changes. See how a change in demand or supply affects price and quantity in this video. Created by Sal Khan.
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- In the bottom left, he said supply will drop due to less demand. Why doesn't he apply the same thinking to the top right – if apple prevent cancer, then the increased demand should attract more producers to focus on apples since that's what people want. Is Sal inconsitent, or is my reasoning wrong?(102 votes)
- Good question. In the bottom left, we made the assumption that farmers could substitute growing apples with growing pears. If pears became more desirable to grow (they could get more $), they would be willing to produce a lower quantity of apples at a given price. If we made the the assumption in the top right that pear growers (or other types of farmers) could substitute for apples, then you could very well have the the quantity supplied at a given price go up (or the entire supply curve could shift to the right). Although the underlying ideas here are pretty basic, what to do with the curves is very dependent on your assumptions (and even the time frame). In either the top right or bottom left scenarios, demand is likely to shift quickly. Supply would take time.(80 votes)
- In the unionization example. Why is it assumed that apple producers would just decrease supply? Why would they not just increase the price of the apples they are selling to meet the higher cost of production?(35 votes)
- It is assumed that in this situation only the production cost of apples changes, nothing else. In this case, producers will automatically be willing to produce less (because they wouldn't profit as much so they'd rather put their money somewhere else). After that (new curve) it is to their advantage to raise the price just enough to reach the new equilibrium point. If they raised the price so much as to be willing to continue producing the same quantity of apples, there would be an excess of them since people are not willing to buy so many of them at that price.(50 votes)
- Are there test questions or other resources that we can use to test ourselves on our understanding? Often I think I grasp it but when I try to explain it to someone else, I get lost.(32 votes)
- To the best of my knowledge, Khan Academy has no test questions for the economics section in general at the time of this post.
I'm somewhat disappointed, considering the nice test support they have in the mathematics section of the Academy. I've always been far more interested in economics, but we can't test ourselves on it yet. :/
I hope this answered your question!(32 votes)
- I have seen a question from a book related to this topic but still can not work out. If the new solar-power technologies have been discovered but will likely only become useful in 10 years, what is likely to happen to supply of oil today? That is saying the promising future energy sources, today's price of energy will go up or down? how about today's quantity ? I dont know what is special with "useful in 10 years"?(12 votes)
- This is really a tricky question. Let's image I'm the boss of Shell, an oil supplier, and I hear that in about 10 years solar-power will become a big competitor for producing energy. This means that in 10 years demand for oil will drop.
At the moment I own multiple oil fields. Let's say there is currently 30 million liters of oil in the ground and I currently collect and sell 1 million liters a year (you don't want too much supply, because that would mean prices would drop and you can't sell any more oil in the future). So for the next 10 years I will sell 10 million of the 30 million liters I have available for a good price, but after those 10 years I'll have trouble selling the last 20 million liters of oil that are still in the ground. I don't want that to happen, so I increase the rate I collect the oil today to 2 million a year. This will move the supply curve to the right. The price will decrease and the quantity increase. I don't mind this lowering in price, because I'd rather have something today than even less after the solar-power technologies are improved.
I maybe made a mistake somewhere, because this is really a tricky question.(23 votes)
- Sal,,.. Is there any method to combine the demand/supply curves, price, quantity, and other factors affecting supply and demand in one mutli-input matrix.... which may be used for making market research?
How people make market research anyway,... because there seems to be many factors to consider.
How can I make a decision for a competing product I'm about to launch in the market depending on the demand/supply curves for all other products in the market? Are the data for the competing companies for supply and demand completely confidential, or they can be deduced from the market using a certain type of research? How can I determine the price? Is it purely trial and error?(10 votes)
- The closest thing to the multi-input matrix you are asking about would be called a linear programming/ optimization model. Basically you try to maximize/minimize/ meet a specific numerical goal subject to a number of constraints. (Ex. you sell chairs and tables each for a different profit. and you want to maximize profit. however you are constrained by the amount of materials/ labor/ estimated amount of quantity demanded for each product. Finding the optimal production mix of tables and chairs to meet your goal of maximizing profit would be found through a linear programming model) the rest of your question can partly be answered by asking "what is you competitive advantage" or why are people going to use your product over someone else's. however, your question is pretty deep, and would require a lot longer of an answer than I provided to fully answer it.(8 votes)
- Wouldn't demand increase as well as supply for disease resistant apples?(8 votes)
- In this case it's talking about farmers having a greater supply of apples they can sell, as they wouldn't sell the diseased apples before.
In other words, regular apple trees may produce 1,000 sellable apples per acre, but this new kind produces 1,500. Those extra 500 grew before, but they were bad and thrown out.
But, it is possible that demand could increase, if they decided to market it as some fancy new apple. But then again, people may shy away from the idea of a GMO apple. Demand for these kinds of apples would be a whole other discussion.(4 votes)
- For Sal's first example, couldn't apple producers keep the same price for apples and produce more apples for more money? If they produce more, why does the price have to go down?(4 votes)
- The idea is that now that because we can produce disease-resistant apples, we can produce more and more apples, not as many are bacteria-infested or are dying. Because there are more apples, we can make our prices lower, driving more sales. While this may not seem intuitive at first, it actually makes a lot of sense. Here's a very simple example:
If you have 10,000 dogs to sell, what would the price for each of the dogs be? Probably something somewhat low, as you have quite a few, to say the less. But, if you only had, say, 4 dogs to sell, your price would probably be higher, because dogs, to you, have become much more scarce.(3 votes)
- how is market equilibrium and elasticity related?(3 votes)
- Elastitcity is how changing one variable affects another. -- If 25% of all chickens died suddenly eggs would become more scarce and thus more expensive.
Equillibrium is the "sweet spot" of where the quantity supplied and quantity demanded meet on the curve -- this gives us the optimal price for product.(3 votes)
- Aren't the bottom two examples indirect effects? For bottom left reducing demand for apple cider will at first drive price of apples down and then some will go out of business with that price, reducing supply. And for the bottom right, with higher wages some will go out of business reducing supply and price go up.(4 votes)
- Is it possible for there to be no equilibrium?(3 votes)
What I want to do in this video is think about how supply and/or demand might change based on changes in some factors in 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 curve 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, clearly impacts the suppliers. All of a sudden, they'll have fewer apples succumbing to disease. And so they will be able to produce more apples. So at any given price point, this will shift the quantity supplied up. So at any given price point, it will shift the quantity of apples supplied up. Or you could say that the entire supply curve is shifted to the right, or supply goes up. And let me draw the entire curve. And obviously, if now we have disease-resistant apples, even our minimum price to start producing apples is lower. Now, when we had the supply curve shift in this way, when it shifted to the right, what happens to the equilibrium price? Well our old equilibrium price was right over here. Our new equilibrium price-- so this is the old one. And this is our new equilibrium price. We're assuming that 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 have probably reasoned through that before, taking an econ class. But this way, at least you have some way to think about it and think about how the curves are changing. Now, let's think about this scenario. So this is before. So in all of these examples, the graph is what happened before the news came out, or the event came out. So this is before. And then a study is released on how apples prevent cancer. So what is that likely to do? Well, no one wants cancer. And so more people are going to be eager to have apples. This will change customer preferences. They will prefer apples even more when they're at the supermarket. So this is clearly affecting demand customer preferences. And so at a given price, people will want-- they will demand a higher quantity of apples. The quantity of apples demanded at a given price will go up. So the demand curve will shift to the right. Or you could say, the demand would go up. So that's the new demand curve. So here, demand goes up. And let me write it over here. In this situation, supply went up. Here, demand goes up. And what happens to the price? Well, this is our old equilibrium price. This is our new equilibrium price. The price clearly went up. So the price went up. And 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. You have fewer apples dying, price went down, more people want to buy them. Here, price went up, and what happened to quantity? Quantity-- this was 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. And for the sake of this, let's assume that 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're going to assume it's a good advertising campaign-- this clearly will make demand go up for-- sorry, it'll make demand go up for cider, 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. Now, if apple cider demand goes down, the apple cider producers are going to demand fewer apples. So this is going to mean that apple demand will go down. At any given price point, apple demand will go down. So apple demand, the demand curve, will shift to the left. Or I should say at any given price point, the quantity demanded will go down. And so the entire demand curve, the entire relationship, will shift to the left. Now, that's not all that might happen. Because if you think about it from the suppliers point of view, and I don't know if this really is 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, I want to-- 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 supply of apples-- so apple supply-- want to be clear here that we're talking about apple-- the apple supply might go down. So it'll also shift to the left. So they're both shifting to the left. Now what is likely to happen here? So 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 did change. So let's see, this is our old equilibrium quantity. This is our new equilibrium quantity. This 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 actually also produced fewer apples. It turns out, I could have drawn this in multiple ways. And actually, 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. So let's say the supply shifts all the way-- the supply shifts really far back. Now, what happened? Well now, our equilibrium price-- because the reduction in supply was kind of more extreme than the reduction in demand. And it really depends on how the curve shapes and all of that. The main thing is to reason through it or to actually see what the actual results are. But in this situation, all of a sudden that 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 of is that the quantity will go down but the price went up. Because this effect-- the supply went down much more than the demand did. And so the price went up. Now I could have done another scenario. I could have done another scenario where maybe the supply barely budged or maybe the demand went down dramatically. Let me draw it where the supply barely budges. 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, once again, quantity definitely goes down. So in all of the scenarios, the quantity will go down. But I've just done three 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 the price based on this. You would actually have to look at the actual curve and see what the new equilibrium prices are. Now let's look at this one. The apple pickers unionize and they demand wage increases. So this is an issue for the suppliers. So all of a sudden, one of their inputs, one of their costs of production, which is labor, has gone up. So if their cost of production has gone up, now at a given price point, they are 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. And when you lower supply, what's going to happen? Well, your equilibrium quantity-- this was our old one, this was our new one-- equilibrium quantity definitely goes down, the quantity went down. And what happened to the price? We're 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. And I encourage you to-- well one, I should have told you this at the beginning, too. You should have tried to do these yourself and then see what I had to say about them-- but I encourage you to try this out with different situations. Think of situations yourself and even think about different markets other than the apple market.