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Market equilibrium

MKT‑2 (EU)
MKT‑2.E (LO)
MKT‑2.E.1 (EK)
MKT‑4 (EU)
MKT‑4.A (LO)
MKT‑4.A.1 (EK)
MKT‑4.A.2 (EK)
MKT‑4.A.3 (EK)
MKT‑4.B (LO)
An equilibrium exists in a market when there is no pressure for the market price to change. Learn about what it means for a market equilibrium to exist, and how to identify a market equilibrium in a market model. Created by Sal Khan.

Video transcript

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 they're 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.