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Studying for a test? Prepare with these 5 lessons on Supply, demand, and market equilibrium.
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Video transcript
What I want to do in this video is think about the difference between the short term and the long term supply. So, let's say in the very short term, if you wanted to get the person in your town, who likes their ... who owns a 2000 Honda Civic to part with their Honda Civic, and this person likes it the lease, for that very first in a given day, you're gonna have to spend about $2500. Now, to get the next person to part with their Honda Civic, they might like is a little bit more. You'll have to spend a little bit more, and so on and so forth, and so we'll call this the short term supply curve. The short term supply curve. This demand curves looks like a demand curve for many things. The very first you get the person will get a high marginal benefit, and then as we add more and more incremental units, you'll have lower marginal benefit for those units. Another way of thinking it, thinking about it a very high price the demand for Honda Civic's, 2000 Honda Civic's, will be low, or the quantity demanded would be low, and at a very low price the quantity demanded will be very high. I know another way at looking at the short term supply, at a low price, the quantity supplied will be low and at a high price the quantity supplied would be high. Now let me give you some more information. Let's say this our town right over here. T for our town, and there are some neighboring towns. Some that's town A, this town B, this is town C, and this is town D. Let's say that all of them have a ... including our town right before I change anything. They all have an equilibrium price. The equilibrium price of $5000 per used Honda Civic. I'm making this video in 2012, and that's about what the Blue Book value of a used 2000 Honda Civic is. You see that this is even the case in our town right over there. Equilibrium price of $5000 and equilibrium quantity of about 22 Civic's per day. But given that all of the towns have an equilibrium price of $5000, let's think about what the long term supply curve for Honda Civic's in our town might look like. The reason why I'm talking to you about other towns is because we can always trade, we can always move Honda Civic's very easily between towns. These might only be about 10 or 15 miles away. So not a difficult thing. What happens if in our town, not in specifically not of the other town, just in our town, the price for Honda Civic's were to go at all below $5000. Now were thinking about the long term. I just talked about the short term, now let's talk about the long term. In the long term if the price went below $5000 in our town, people will catch wind of it. They will go here and you can actually sell your Civic's for $5000 in other towns, and no one will want a actually supply Honda Civic's in our town for $5000. They'll just export them out. They'll export them out to neighboring towns where they can get more money for them. So in the long term if the price were be anything lower than $5000, the quantity in our town would get pretty close to zero. Likewise, if the price in our town went even slightly higher than $5000, then all of a sudden it becomes incentive for people in other towns, instead of selling their car in their town for $5000, they would want to drive a couple of miles to our town and sell it. If the equilibrium or if the price were to become slightly higher than $5000, then all of a sudden you would have a huge supply. A lot of Civic's would be coming into town. So our long term supply curve would look something like this. In a lot of books I drew this as a very slightly upward sloping. In many books they'll just be purist about it and they'll just do horizontal, perfectly, elastic curve. This is a reminder. What is elasticity mean? With the very very small change in, or a perfectly elastic means a very small change in price, you have an infinite change in quantity. So something is very elastic of a very small change in price is to a very very large change in quantity. So this approaching perfect elasticity, or you can almost say that the absolute value of the elasticity is approaching the elasticity of supply here is approaching infinity. This is interesting, because now we can do an interesting thought experiment. Let's say, so this is our short term supply, and this is our long term supply. What happens over many days when people catch wind of the prices in neighboring towns, and there's some time for people to move cars from one town to another. Let's say in our town the most fashionable person in our town just traded in their Royals Royce, and they bought themselves a 2000 Honda Civic. They are very proud about this, and their flaunting it around town, their 2000 Honda Civic. It gets shown in all the magazines. The local magazines. This is happening just in our town, not in the neighboring towns. And all of a sudden in just our town, it becomes very trendy and very fashionable to have a used 2000 Honda Civic. This is only happening in our town, not in the other towns. The other towns are equilibrium prices aren't changed. We're not changing the long term supply group at all. So, what's going to happen? Because everyone wants a 2000 Honda Civic now, the preferences have changed and any given price or more 2000 Honda Civic's will be demanded. So the demand will increase. The demand will increase, so the new demand curve will look something like this. It will shift to the right. In the short term, before any Honda Civic's have time to be shipped to you, before anyone in the other town catch wind of the new equilibrium price. In the short term the equilibrium price will move up, and that makes sense, because people will be eager. They'll just buy whatever's in town. The equilibrium price will move up to $5500 per Civic, and the equilibrium quantity will go up. Though so many of the people around them, maybe, their obviously, their willing to sell part with it now. You have more people now, more of the money trendy people who are willing pay for it now. But what's going to happen in the long term? People in the neighboring towns are going to catch wind that you can sell your Honda Civic's not for $5000 but for $5500. Because for some strange reason, it's a very trendy car in this town right over here. So over the long term the price is going to go back to where the new demand curve intersects with the long term supply curve. So over time going to shift back to this point right over here to the long term supply. Over time the price is going to go to $5000, and the quantity sold is just going to be much higher, and that's makes complete common sense. It's now a very fashionable car in this town, and people are going to start importing. It didn't become all of a sudden fashionable in the other towns, and now people with be importing into this town.