Supply and Demand: Crash Course Economics #4

Summary

This Crash Course Economics episode explores the concept of markets, emphasizing voluntary exchange as the key to their efficiency. The video explains how supply and demand, through price signals, guide resource allocation and production quality. It also discusses the impact of external forces on market equilibrium and the ethical considerations of applying market principles to sensitive areas like organ donations, highlighting the need for regulation and the human element in economic laws.

Takeaways

• 🛒 Markets are the primary mechanism through which goods and services are exchanged, highlighting the importance of voluntary exchange where both buyers and sellers benefit.
• 💰 The concept of voluntary exchange is central to markets, where transactions are mutually beneficial, with both parties feeling better off after the trade.
• 📈 Efficient allocation of resources is a key function of competitive markets, which use price signals to guide the distribution of resources towards their most efficient use.
• 📉 Overproduction or underproduction of goods can be self-corrected by market forces, where changes in supply and demand affect prices and production incentives.
• 🍓 The example of strawberries illustrates the principles of supply and demand, showing how prices are determined by the intersection of these two forces.
• 📊 The law of demand states that as prices rise, quantity demanded falls, and vice versa, typically represented by a downward-sloping demand curve on a graph.
• 📈 The law of supply indicates that as prices increase, the quantity supplied increases, and vice versa, represented by an upward-sloping supply curve.
• ⚖️ Equilibrium in a market is reached when the quantity demanded equals the quantity supplied, establishing an equilibrium price and quantity.
• 🌡 External factors can shift supply and demand curves, affecting the market equilibrium and resulting in changes in price and quantity.
• 🚒 Markets are not universally applicable; certain goods and services, like public safety or human organs, may require regulation or alternative systems to ethically allocate resources.
• 🌐 The power of supply and demand extends beyond individual markets, affecting a wide range of commodities, including volatile ones like gasoline.

Q & A

What does Mr. Clifford suggest is often taken for granted in the context of economics?

Mr. Clifford suggests that markets are often taken for granted in the context of economics, as they are the primary mechanism through which goods and services are exchanged.

What is the concept of voluntary exchange in markets?

Voluntary exchange is the idea that buyers and sellers willingly decide to make a transaction, valuing what they receive more than what they give up, resulting in a win-win situation for both parties.

How does the labor market operate based on the principles discussed in the script?

In the labor market, workers, like the cashier in the script, voluntarily decide to work because they value the income more than their leisure time. Employers value the labor more than the wages they pay, leading to a mutually beneficial arrangement.

What is the role of price signals in guiding the distribution of resources in markets?

Price signals in markets provide information that helps allocate scarce resources towards their most efficient use. Changes in prices can incentivize producers to adjust production quantities according to market demands.

Why do businesses sometimes struggle to take advantage of consumers in transparent markets?

In transparent markets where buyers have freedom to choose, businesses struggle to take advantage of consumers because any unethical practices can lead to a loss of customers, as consumers can easily switch to competitors.

What is the fundamental principle behind supply and demand?

The fundamental principle behind supply and demand is that the interaction of these two forces determines the market price and quantity of goods. The equilibrium price and quantity occur where the supply and demand curves intersect.

How does the law of demand describe the relationship between price and quantity demanded?

The law of demand states that as the price of a good increases, the quantity demanded decreases, and vice versa. This is represented graphically by a downward-sloping demand curve.

What is the law of supply and how is it represented on a graph?

The law of supply states that when the price of a good increases, suppliers are incentivized to produce more, and when the price decreases, they produce less. This is represented by an upward-sloping supply curve on a graph.

What is a surplus in economic terms, and how does it relate to price?

A surplus occurs when the quantity supplied is greater than the quantity demanded at a given price level. This typically leads to a decrease in price as sellers try to sell off the excess supply.

What is a shortage in economic terms, and how does it affect the market?

A shortage occurs when the quantity demanded exceeds the quantity supplied at a given price level. This usually results in an increase in price as buyers compete for the limited supply.

How can external forces affect the equilibrium price and quantity in a market?

External forces, such as changes in weather, technology, or economic conditions, can shift the supply and demand curves, leading to a new equilibrium price and quantity that reflect the changed market conditions.

What are some ethical concerns associated with a market for human organs?

Ethical concerns with a market for human organs include the potential exploitation of the poor and vulnerable, the risk of organ theft and trafficking, and the undermining of altruistic donations.

How do economists propose to address the shortage of organs for transplants while considering ethical implications?

Economists propose regulated market approaches, such as kidney exchanges, where willing donors are matched with patients in need, potentially increasing the supply of donated organs while addressing some ethical concerns.

What is the significance of the supply and demand model in understanding various markets beyond just strawberries?

The supply and demand model is significant because it applies to all sorts of markets, not just for strawberries. It helps in understanding the dynamics of price and quantity in response to changes in market conditions for a wide range of goods and services.

Outlines

00:00

🛒 Introduction to Markets and Voluntary Exchange

The script begins with Mr. Clifford and Adriene Hill introducing the concept of markets in the context of everyday goods like strawberries. They emphasize the ubiquity of markets and the fundamental principle of voluntary exchange, where both buyers and sellers willingly engage in transactions that improve their individual situations. The discussion highlights the efficiency of markets in allocating resources and the role of price signals in guiding production. The dialogue also touches on the idea that businesses, when operating in transparent markets, are less likely to exploit consumers due to the power of consumer choice.

05:04

📊 The Dynamics of Supply and Demand

This paragraph delves into the core economic model of supply and demand, using the example of strawberries to illustrate how prices are determined in a market. The law of demand is explained, showing that as prices increase, the quantity demanded by consumers decreases, and vice versa. Similarly, the law of supply is discussed, indicating that producers are incentivized to produce more when prices rise. The concept of equilibrium, where the quantity demanded equals the quantity supplied, is introduced, establishing the equilibrium price and quantity. The paragraph also addresses the variability of prices due to external factors and the shifting of supply and demand curves, leading to different market outcomes.

Keywords

💡Markets

Markets are the central theme of the video, defined as any place where buyers and sellers meet to exchange goods and services. They are integral to the video's narrative, illustrating how voluntary exchange occurs within them, making both parties feel better off. The concept is exemplified by the discussion of strawberries, where both the buyer and the seller benefit from the transaction, highlighting the efficiency of markets in resource allocation.

💡Voluntary Exchange

Voluntary exchange is a key concept in the video, referring to the mutual agreement between buyers and sellers to engage in a transaction. It is the foundation of market transactions, as seen in the script where a buyer values a box of strawberries more than the money they exchange for it, and the seller values the money more than the strawberries. This mutual benefit is what drives markets and is a central message of the video.

💡Efficiency

Efficiency in the context of the video refers to the optimal allocation or distribution of scarce resources in a market. The script discusses how competitive markets efficiently allocate resources through price signals, adjusting production based on supply and demand. For instance, if there is an overproduction of strawberries, the price falls, signaling farmers to produce less or switch to other crops, thus maintaining market efficiency.

💡Price Signals

Price signals are the information generated by markets that guide the distribution of resources. In the video, they are depicted as the mechanism through which the market communicates the need for more or less of a product. When strawberry prices fall, it signals to farmers that there is an oversupply, and they should produce less or switch to other crops, ensuring the market remains efficient.

💡Supply and Demand

Supply and demand are fundamental economic concepts explained in the video, representing the relationship between the quantity of a good that producers are willing to sell and the quantity that consumers are willing to buy at various prices. The video uses the example of strawberries to illustrate how changes in supply and demand affect prices and quantities, ultimately determining the market equilibrium.

💡Equilibrium Price and Quantity

The equilibrium price and quantity are the points where the supply and demand curves intersect, indicating the price at which the quantity of goods that buyers are willing to purchase equals the quantity that sellers are willing to sell. The video script uses this concept to explain the natural balance in markets, such as the market for strawberries, where the equilibrium ensures that both buyers and sellers are satisfied with the transaction.

💡Surplus and Shortage

Surplus and shortage are terms used in the video to describe market imbalances. A surplus occurs when the quantity supplied exceeds the quantity demanded at a given price, leading to a price decrease. Conversely, a shortage happens when the quantity demanded exceeds the quantity supplied, causing prices to rise. The video script uses these concepts to explain the dynamics of supply and demand and how they naturally correct market imbalances.

💡External Forces

External forces in the video are factors outside the market that can shift the supply and demand curves, changing the equilibrium price and quantity. The script gives the example of weather affecting the supply of strawberries, causing the supply curve to shift to the left due to reduced production, which in turn affects the market equilibrium.

💡Ethics

Ethics is a concept discussed in the video in relation to markets, particularly when considering the regulation of certain goods or services. The video raises the question of whether a market for human organs would be ethical, highlighting the moral dilemmas that can arise when the principles of supply and demand are applied to sensitive areas, such as organ donation.

💡Regulation

Regulation is presented in the video as a necessary component for certain markets to function ethically and efficiently. The script discusses the need for regulation in the market for human organs to prevent exploitation and ensure fairness. It also mentions the support among economists for regulated markets, such as kidney exchanges, to address shortages and ethical concerns.

💡Economic Laws

Economic laws, as mentioned in the video, refer to the predictable behaviors observed in supply and demand, which are often likened to physical laws like gravity. However, the video emphasizes that these are not absolute laws, as they are dependent on human actions and choices. The script reminds viewers that while supply and demand can be predictable, they are ultimately influenced by the decisions of buyers and sellers in the market.

Highlights

Markets are the primary mechanism through which goods and services are exchanged, often taken for granted by most people.

The concept of voluntary exchange is fundamental to markets, where both parties benefit from the transaction.

The labor market operates on the same principles of voluntary exchange, with workers and employers valuing their contributions differently.

Market efficiency is often underrated, with competitive markets effectively allocating scarce resources.

Price signals in markets guide the distribution of resources, adjusting production based on supply and demand.

Markets incentivize the production of high-quality products, as poor quality can lead to a lack of demand.

The portrayal of businesses as exploitative is challenged by the idea that transparent markets protect consumers.

Consumer choices in a free market directly influence what is produced and how, through the spending of every dollar.

Supply and demand are the cornerstone of economic analysis, determining the price and quantity of goods in the market.

The law of demand states that as prices rise, the quantity demanded falls, and vice versa.

The law of supply indicates that producers will supply more at higher prices and less at lower prices.

Equilibrium price and quantity occur where supply meets demand, establishing a market balance.

External forces can shift supply and demand curves, altering market equilibrium and prices.

Economists generally avoid opinions on fair prices, as voluntary exchange implies a mutual benefit in pricing.

The supply and demand model is applicable to various markets, not just specific goods like strawberries.

The volatility of gasoline prices is a clear example of supply and demand in action, affected by global economic conditions and technological advancements.

Markets are not universally beneficial; some areas, like public services and ethical considerations, require regulation or avoidance of market mechanisms.

Kidney exchanges are proposed as a regulated market solution to increase the supply of organs for transplants.

Economics is about human choices and their consequences, with supply and demand being influenced by human actions rather than absolute laws.

Crash Course Economics is funded through Patreon, emphasizing the voluntary exchange principle in supporting the show.

Transcripts

Mr. Clifford: I'm Mr. Clifford... and this is Adriene Hill, welcome to Crash Course economics.

Let's start by talking about something that most people take for granted.

Adriene: Is it grocery stores, is it the census, is it GPS, is it goldfish, is it frogs? Oh,

it's probably these strawberries, right?

Mr. Clifford: No, I was gonna say markets.

Adriene: But, strawberries are great.

Mr. Clifford: Yeah, but where do you think strawberries came from?

Adriene: The ground, the farmer, the market, the grocery store, the miracle of life?

Mr. Clifford: Now look around you. Where did all that stuff come from? And who made it?

And why? Well, the answer is simple, but it's underrated. It's markets, and for most of

us farms and factories and stores, but mainly it's just markets. Can I have a strawberry now?

[Theme Music]

Adriene: So a market is any place where buyers and sellers meet to exchange goods and services.

The key to markets is the concept of voluntary exchange. That is, that buyers and sellers

willingly decide to make a transaction.

Let's say you go to a farmer's market and you buy a box of strawberries for $3. You

value the box of strawberries more than the $3 you gave up to get it. The seller valued

the $3 more than the box of strawberries. The transaction's a win-win because you got

your strawberries and the farmer got his money. You both felt better off; that's voluntary exchange.

This same process happens in the labor market. Say that instead of the farmer's market, you

bought your strawberries at your local supermarket. The cashier voluntarily decided to work there.

He values the $10 an hour he makes there more than he does sitting at home watching the

Walking Dead. At the same time, the owner of the store values the labor of the cashier

more than the $10 an hour she pays him.

And so it goes, on and on, all the way up the chain of production, from the driver that

delivered the strawberries to the farmer that grew the strawberries to the tractor that

the farmer purchased. The point is that markets are everywhere and most are based on voluntary exchange.

Mr. Clifford: The part of all this that most people take for granted is how efficient the

system is. Competitive markets turn out to be pretty great about allocating or distributing

our scarce resources towards their most efficient use.

So if farmers produce, like, too many strawberries, then the price will fall as sellers try to

sell them off. Lower prices means less profit for the strawberry farmers, and those farmers

will have an incentive to produce something else like lettuce or Brussels sprouts. So

if farmers don't produce enough strawberries, buyers will bid up the price and the farmers

will have an incentive to produce more, which then drives down the price. That's like magic except it's not.

The information that markets generate to guide a distribution of resources is what economists

call price signals. Markets also incentivize the production of high-quality products. If

the strawberries are brown and nasty then no one's gonna want to buy them, and if the

tractor's a piece of junk, the strawberry farmer's gonna tell other farmers to buy some other tractor.

Now, ideally the eventual result of voluntary exchange is that sellers can't make themselves

better off without making something that makes buyers better off.

Businesses, and in particular large corporations, are often villainized as greedy, heartless

institutions that take advantage of consumers, but if markets are transparent and buyers

are free to choose, then businesses will have a hard time taking advantage of people.

Now obviously greed and deception happen in real life, and there are situations where

consumers don't have a choice, but for the most part, if you really don't like the policies

or practices of a particular company, then don't shop there. After all, in the free market,

every dollar that is spent signals to producers what should be produced and how it should be produced.

Adriene: We've established that prices and profit determine where resources should go,

but where do prices come from? Who determines the price of my box of strawberries? To answer

that, we're gonna draw - get ready for it - supply and demand. Let's go to the runway.

Mr. Clifford: If there's only one thing you should learn in economics, it's supply and

demand. Let's use the market for strawberries to help us understand this concept. Up here

on the Y axis, we have the price of strawberries, down here on the X axis we have the quantity of boxes of strawberries.

Let's start by looking at buyers and how they respond to a change in price. If the price

goes up for strawberries, then some buyers will go buy blueberries or they'll go on that

all bacon diet. The point is, they're gonna buy less strawberries. And if the price goes

down for strawberries, then people are gonna buy more. This is called the law of demand:

when the price goes up, people buy less, when the price goes down, people buy more. On the

graph it's show by a downward sloping demand curve.

Now let's think about sellers like the farmer in the farmer's market. If the price of strawberries

go up, then that farmer will make more profit, so will have an incentive to produce more

strawberries. If the price goes down then he's not gonna want to produce strawberries.

That's called the law of supply, and on the graph it's shown by an upward sloping supply curve.

Now let's put supply and demand together. If the price is really high at $10 then producers

would like to produce a lot of strawberries, but consumers won't want to buy them. This

mismatch is called a surplus. And if the price goes down for strawberries, let's say down

to $1, then buyers want to buy a whole lot, but producers won't have incentive and they'll

produce very little. At the end you have mismatch, but this one's called a shortage.

And there's only one price where the quantity that buyers want to buy is exactly equal to

the quantity that sellers want to sell, and it's right here where supply equals demand.

The price is called the equilibrium price, and the quantity is called the equilibrium quantity.

Adriene: Okay, sure your graph makes sense, but the price of strawberries isn't always

$3; sometimes it goes up to $6, and at Whole Foods, local, artisanally grown strawberries,

the fancy fancy strawberries, can cost upwards of $12. But I guess Whole Foods is a whole

other world where price has nothing to do with realistic economics. We'll stick to normal

strawberries. In fact, the prices for all sort of stuff change all the time.

External forces can shift both the supply and demand curves, changing the equilibrium

price and quantity. For example, let's assume that this graph shows the demand and supply

of strawberries in the summer. What happens in the winter? Will the change in weather

affect buyers' demand? Or producers supply? Spoiler alert: it's supply. Colder temperatures

make it harder to grow strawberries. The result is the entire supply curve is gonna shift to the left.

This is because at all possible prices, there'd be fewer strawberries produced. That's it.

This graph is just a tool that economists and everyone else used to show the results

of a change in a market. I know it seems complicated at first, but there are really only four things

that can happen in a market.

Supply can decrease, supply can increase, demand can decrease, or demand can increase.

Some people might wanna talk about a price being fair or right. Well, that all depends

on your point of view. The buyer always considers a low price to be a very fair price, while

the seller considers it unfair and vice versa. In general, economists don't really like to

push opinions about prices. Voluntary exchange suggests that the price is there for a reason.

For example, assume the demand for strawberries inexplicably falls, so the demand curve shifts

to the left and the equilibrium price and quantity fall. Farmers might go to the government

for assistance, but most economists would argue there's no reason to bail them out.

The market's spoken. Strawberries are so over.

Furthermore, if the government helps the farmers by giving them a subsidy, it would be putting

resources towards something that society doesn't value. That would be inefficient. Luckily,

every reasonable person on Earth values strawberries, so they continue to get produced.

Mr. Clifford: Now, the downside is, the supply and demand model only applies to analyzing

strawberries. Nah, I'm just joking; it applies to all sorts of stuff. In fact, let's look

at a market for a commodity known for its volatility, both because of its fluctuating

prices and because sometimes, it explodes: gasoline.

Now when you see gas prices are moving all over the board, that's just demand and supply.

For example, in 2014, the retail gas price in the United States fell dramatically. Why?

Well, it was demand and supply. The economies of both Europe and China weakened, which decreased

the demand for gasoline, shifting the demand curve to the left. At the same time, new fracking

technology and restored production of oil in Iraq and Libya caused the supply of gasoline

to increase, or shift to the right. The combination drove gas prices down by more than 40% per

gallon. And that's it. Now you can tell all your friends you understand supply and demand.

It's a big day for you. It's a big day.

Adrienne: So markets and supply and demand are awesome. But sometimes, they're not awesome.

For example, we don't wanna use the market approach when it comes to firefighters.

[Phone rings]

911, what's your emergency?

Mr. Clifford: My house is on fire, how much do you charge to put it out?

Adrienne: It'll be $10,000, what's your credit card number?

Mr. Clifford: They're all melted!

Adrienne: [hangs up] Okay, that one's obvious, but what about the market for human organs?

After all, there's a huge shortage, and thousands of people die each year waiting for transplants.

Should there be a competitive market for human kidneys? A free marketeer would say sure,

why not? If a donor wants $15,000 more than he wants his other kidney, why stop him?

Mr. Clifford: Well. Ethics. I mean, there's several problems that arise with an unregulated

market for human kidneys. First is the moral question, is it fair for a poor person who

can't afford a kidney to die while a rich person lives? Well, probably...no, not at

all. Another problem results in the law of supply. When there's an increase in the price

of kidneys, there's an incentive for people to steal and sell kidneys. In fact, the World

Health Organization has stated, "Payment for organs is likely to take unfair advantage

of the poorest and most vulnerable groups, undermines altruistic donations, and leads

to profiteering and human trafficking. I mean, all bad things. Now, that being said, why

do 70% of American economic association members support some kind of payment for organ donors?

Adrienne: Well, it's because you can solve some of these problems with a market approach,

but the market must be regulated. Often family and friends are willing to donate a kidney,

but they're not a match for the patient. Economists generally support creating kidney exchanges,

where pairs of willing donors are matched with strangers that agree to donate to each

others' loved ones. In both cases, the supply of donated kidneys would increase, which would

alleviate some of the shortage. Like we've said before, free markets are awesome, but they

can't solve all our problems Sometimes, they need to be regulated, and sometimes, they should be avoided.

So there you have what, for most people, is the start and for many, the end of economics.

Supply and demand. Economists and politicians often like to refer to the interaction of

supply and demand as laws, and we've done that too, but to be clear, it's not an absolute

law, like the law of gravity.

Mr. Clifford: As we've tried to point out here on Crash Course, economics is about human

choices and their consequences. Even though supply and demand behave in a predictable

way that we've seen in the models, we can't lose sight of the fact that both of them are

reliant on humans acting as buyers and sellers.

Adrienne: Our actions influence supply and demand in a way that they can't influence

gravity, no matter how much we might want to.

Mr. Clifford: Whoa.

Adrienne: That's After Effects. And that's something to keep in mind when you hear us

or anybody talking about economic laws. Thanks for watching. We'll see you next time.

Mr. Clifford: Thanks for watching Crash Course Economics, it was made with the help of all

these nice people . You demanded it, and they supplied it. Now, if you want them to keep

supplying it, please head over to Patreon. It's a voluntary subscription platform that

allows you to pay whatever you want monthly to help make Crash Course free for everyone

forever. Thanks for watching. DFTBA.