Supply and Demand: Crash Course Economics #4
Summary
TLDRThis 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
🛒 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.
📊 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.
Mindmap
Keywords
💡Markets
💡Voluntary Exchange
💡Efficiency
💡Price Signals
💡Supply and Demand
💡Equilibrium Price and Quantity
💡Surplus and Shortage
💡External Forces
💡Ethics
💡Regulation
💡Economic Laws
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.
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