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Main content
Current time:0:00Total duration:10:17
AP.MACRO:
MKT‑2 (EU)
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MKT‑2.E (LO)
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MKT‑2.E.1 (EK)
AP.MICRO:
MKT‑4 (EU)
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MKT‑4.A (LO)
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MKT‑4.A.1 (EK)
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MKT‑4.A.2 (EK)
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MKT‑4.A.3 (EK)
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MKT‑4.B (LO)

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 so let's draw ourselves a little graph here and we already know this right over here the vertical axis is the price axis and this is we're going to say it's price per pound and the horizontal axis this is the quantity the quantity of apples and let's put some tick marks here let's say that's one dollar a pound two dollars a pound three dollars a pound four dollars a pound and five dollars and let's say this is thousands thousands of pounds produce and we have to set a period so let's say this is all for the next week and so this is 1000 pounds 2,000 3,000 4,000 and 5,000 now let's think about both the supply and the demand curves for this market or potential supply and demand curves so first I will do first I will do the demand so if we if the price of Apple's were really high and I encourage you to always think about this when you're about to draw your demand and supply curves if the price of Apple's were really high what would happen to consumers well they say they wouldn't demand much so the quantity demanded would be low so if the price were high maybe the quantity demanded is like 500 apples 500 apples and and once again I'm 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 so at a price of $5 the quantity demanded would be about 500 maybe at a price of $1 the quantity demanded would be maybe 4,000 pounds and so 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 and I'll think about our supply curve well there's some price below which we aren't even willing to produce apples so let's say that's like 50 cents so at 50 cents that's where we're even just willing to start producing apples let's say if Apple if the price of Apple's got to $1 we the quantity we'd be willing to supply is about a thousand pounds and it just keeps increasing as the price increases so this is the supply curve when I talk about we I'm talking about all of 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 this for the global Apple market however you want to view it but for the sake of this video let's assume it's like our little town that is fairly isolated and all of that now let's think about what happens in different scenarios what happens if the the 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 and so given that given their given the supply curve they only they're only they only are able to supply only supply 1,000 pounds so this is what the supplier is planned for and this is where they set the price point at one dollar at one dollar per pound now what's going to happen in that scenario well in that scenario they supplied 1,000 the quantity supplied is 1,000 pounds so let me write this down so I'll do it in pink for this scenario so in this area the quantity quantity supplied quantity supplied is 1,000 pounds and what is the quantity demanded quantity demanded demanded demanded and this is all a scenario where the price the price or the initial price that the growers or the producer set was one dollar per pound one dollar per pound well the quantity demanded one dollar per pound is four thousand four thousand pounds of apples four thousand pounds of apples so what do we have here well here we have a shortage we have a shortage of we have a shortage a shortage of 3,000 apples at that price point at a dollar a lot more people are going to want to buy apples and these the producers just didn't I guess did they didn't they didn't figure that out right and they didn't produce enough apples now what will naturally start happening if you have the short you have all these people who want to buy apples and you only have so many apples there well 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 price is going to start going up people are going to start bidding up the apples they want them so badly they're going to start bidding them up and as they start getting bit up the producers are going to say wow there's so many people we're running out of apples we also need to increase the quantity produced and so the quantity the quantity will also go up so the price will go up if you look at from the from the suppliers point of view the price will go up and the quantity will go up they will move they will move along this line there so maybe in the next period there's less of a shortage or they get slowed they move they move away from that shortage situation if the quantity if the price and quantity increase a little bit so maybe the price goes to $2 now and the quantity goes to I don't know this looks like about 1,900 1,900 pounds now of a sudden you have less of a shortage and I think you see that I'm getting to an interesting point over here but I won't go there just yet I won't go there just yet now 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 all say wow people want our apples so badly let's just the price really high $3 and $3 we're really excited about producing apples so we the suppliers 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're hoping to sell 3,000 pounds of apples so this is where maybe were they adjust to the next week but what's going to happen there at a price of $3 so that's this scenario right over here the price of $3 so the price is now the price is now $3 per pound well now the quantity quantity supplied the quantity supplied is going to be 3 thousand pounds three thousand three thousand pounds I could write three thousand pounds and what is the quantity demanded the quantity demanded quantity demanded is now much lower the price is high now because consumers might want to go buy other things or they too can't afford an Apple or whatever it might be and so now the quantity demanded that looks like about not know 1300 1300 pounds 1300 pounds so what situation do we have now well now we have a much bigger supply or the quantity supplied is much bigger than the quantity demanded so now we face we face a surplus so now we have a surplus let me not 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 seven hundred will get us to two thousand we have a surplus of 1700 pounds of apples and now what happens in a surplus situation well apples won't stay good forever so maybe the producers get a little desperate so you start they start selling they start reducing the price maybe to start attracting some consumers so they start reducing the price and also when they when they start seeing that the price is going down and you have this glut of apples and that they're all going bad and they're not getting sold the quantity the quantity is also going to start going down they'll produce fewer and fewer apples and so we'll move here we'll move here along the supply curve and as you decrease as you decrease the price as you decrease the price what's going to happen to the demand curve well the demand is going to go up so over here the price was too high so there's it's natural for the sellers to lower the price and so when you lower the price it also reduces the quantity we go this way and when you lower the price it increases demand you go that way if the price to get from the get-go were too low then you have this huge shortage things get bit up the prices go up as the price goes up the suppliers want to produce more they move up the curve and as the price boot goes up then the people will demand less and you see that it's all converging on a point right over here the two lines intersect and let me do that in a it's all converging right over there and that's the point at which supply that's the price at which this is the price at which the quantity supplied will equal the quantity demanded and we call this price we call this which looks like for this scenario maybe about two dollars and fifteen cents so let me just write it there so two dollars and fifteen cents we call that the equilibrium price equilibrium equilibrium equilibrium price is two dollars and fifteen cents a pound and it's the price at which the quantity supplied is equal to the quantity demanded and so this this quantity this this quantity where supply or the quantity supplied is equal to the quantity demanded that's the equilibrium quantity equilibrium equilibrium quantity and that right over here looks like it's right about I don't know 2,200 2,200 pounds 2,200 pounds and assuming nothing else changes this is a good scenario for both the consumers and the producers that they keep producing 2,200 they charge this price and everything's happy all the apples get sold and none of them go bad