Market equilibrium and changes in equilibrium
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Changes in market equilibrium
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.