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3 Tutorials that teach Supply and Demand

# Supply and Demand

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Author: Kate Eskra
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This lesson covers the basics of supply and demand.

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Tutorial

## SUPPLY AND DEMAND

Source: Image of Demand Graph created by Kate Eskra, Image of Demand Shift (Decrease) created by Kate Eskra, Image of Demand Shift (Increase) created by Kate Eskra, Image of Supply Curve created by Kate Eskra, Image of Supply Curve Shift (Increase) created by Kate Eskra, Image of Supply Curve Shift (Decrease) created by Kate Eskra, Image of Equilibrium created by Kate Eskra

## Video Transcription

Hi, welcome to macroeconomics. This is Kate. This tutorial is on supply and demand. As always, my key terms are in red, and my examples are in green.

So in this tutorial, I'll be talking with you about the laws of supply and demand. We'll look at why a supply curve is generally upward sloping, and a demand curve, downward sloping. I'll define for you ceteris paribus means, and talk about why it's important when we're looking at supply, demand, and equilibrium. Finally, we'll combine supply and demand, and look at equilibrium.

So supply, let's start with that one. Supply is the idea that there are goods and services available for a range of price levels, at any given point in time. For supply, you really have to think like a producer. So supply means, I'm able to produce something. And I'm willing to supply it at a certain price.

So if we look at a farmer here, I have a chart where there are different prices of apples. And the quantity that he is willing to supply. If we chart those numbers, you can see a supply curve is upward sloping.

As he believes he can receive a higher price for his apples, he's willing to supply a greater quantity. As the price falls, he's not willing to supply as great of a quantity. And that's basically the law of supply.

Notice price and the quantity being supplied move in the same direction, so there's a positive relationship between them for supply.

This is known as movement along a curve. Either supply or demand that you'll see later. And when the price of a product changes, that's going to impact the quantity being supplied or the quantity being demanded. Because we're just moving up and down that curve.

However, this assumes a Latin phrase called ceteris parabis, which means holding everything else constant. So the idea is, like you saw, as the price of apples falls, certainly we can expect that farmer to not want to produce as many apples. It's not worth his time as much. But what ceteris paribus assumes is that that's the only thing that changed.

For example, I gave you two examples here, the price of their resources, or their inputs didn't change. Their technology didn't change. Just the price of the apples changed. And that's where we have that movement along that curve.

But we know that things in the world are always changing. So if something else changes, like fertilizer gets more expensive, or they have to suddenly pay their workers more money because wages rose, or if there's a new technology that's developed that makes a lot more efficient. Those things will not just be movements along the supply curve.

They will not be supplying the same amount of apples, yet the price of the product, the price of the apples, isn't changing. So now we need to shift the supply curve and the same rules will apply for demand.

So when we shift a curve, this is meaning that a different quantity is going to be supplied or demanded at all prices. And for supply, notice here in your key term definition, the shift's occurring due to more or less resource access, a decrease or increase in the price of input, changes in regulation like taxes and subsidies. We'll talk about demand in a little bit.

So for example, if there's an increased cost to the farmer, like his fertilizer getting more expensive, now he cannot supply as many apples at every price level. So this is seen as a shift of the supply curve to the left, which is a decrease in supply. OK? And this happened because the price of apples didn't change. There's now a completely new relationship between price and quantity.

Like I said in the key term definition, this slide here is just for you as a reference to remind you what causes a shift in supply. These are all things that are going to impact that farmers ability to produce his apples. So changes in input prices, changes in resource access, technological changes, and any kind of government policies, like attacks or subsidy.

So the big idea that you want to keep in mind, is that something here, in order for there to be a shift in the supply curve, something has really changed the production capabilities of a firm. So anything that's going to make it easier or less expensive to produce it, will cause an increase in supply to the right. And anything that would make it more difficult or more expensive, would cause a decrease in supply, or a shift to the left.

So again, here are some reminders. A change in input price, like a fertilizer got more expensive, that will cause a decrease in supply as shown there. But an increase in technology, if a technology improves, and the farmer can be more efficient, they can now supply more apples at all prices. So that's a shift in supply to the right.

OK, so that's supply, but now let's talk about demand. Demand is easier for most people to think about, because we are consumers, and we are looking at purchasing stuff almost every day of our lives. So this is the quantity of goods and services that we're looking at purchasing, when we hold constant things like income, and other factors that we'll talk about.

So demand is all about I want something, and I'm able to afford it. And I have a willingness to pay for the product.

So let's stick with our apples example, my favorite tend to be Granny Smith, so that's what I'll use here. Notice again I have the prices over here, and the quantity-- there's a different relationship this time, because obviously, even though producers want to sell their product for high prices, we don't want to buy them for high prices. I'm not paying \$2 for one apple. As the price falls, notice how my quantity that I'm demanding rises. So with demand, there's an opposite relationship from supply. Here there's an inverse relationship between price and quantity. As prices fall, the quantity demanded rises. We want to buy more. As prices would rise, we would want to buy less.

Again, this is assuming ceteris paribus. As the price of Granny Smith apples goes up, yes, we want to buy fewer Granny Smith apples. But that assumes that only the price of green apples has changed. Other things are changing all the time. The price of gala apples didn't change. The price of oranges, or bananas, didn't change, and our income did not change.

Again, we know that things are always changing. So if something else changes, like I have to take a really significant pay cut, or maybe I read an article saying Granny Smith apples are the least healthy apple. I'm not going to buy the same amount of Granny Smith apples now, but the price of Granny Smith apples didn't change. So I now need a new curve.

So here again, and you can go back to that key term definition for a shift in the demand curve, because something else changed other than the price, there's a new relationship between price and quantity. So if I took that significant pay cut, I am buying a different quantity at all prices. Notice how my demand, or the quantity that I'm buying, fell at every single price level. So I need a new demand curve, shifting to the left, to show my decrease in demand.

These are the things that would cause a shift in the demand curve. Our changes in income impact how much we are willing and able to purchase. Changes in the price of related goods, like substitutes and complements. I'll give you an example in a minute here. And then our changes in taste preferences or advertising.

So if I make less money, I can't afford as many, so we saw my curve shifting to the left. That's a decrease in demand. And then changes in prices of related goods. If in fact, caramel apple dip goes on sale, I'm going to buy more Granny Smith apples. So even though Granny Smith apples didn't change in price, something else did, causing me to buy more. And this is what that would look like. If caramel apple dip goes on sale, that would only be a change in quantity demanded, or a movement along the caramel apple dip demand curve, but here I'm buying more Granny Smith apples. And the price of Granny Smith apples didn't go down. So it's an increase in demand to the right.

Changes in taste and preferences are huge in the demand world. So when Tickle Me Elmo got really, really popular, they experienced an increase in demand. Anytime there's negative news reports, like an E coli breakout in spinach, obviously, people would buy less spinach at all prices.

Finally, now we get to talk about equilibrium. Where we combine supply and demand, put them on one graph, and where we see them meet, that will be equilibrium, quantity, and give us an equilibrium price as well.

So here, I put for you both the quantity of apples supplied and the quantity of apples demanded. If we graph them like that, you can see that at any price above \$1-- I put that in red here-- the quantity of Apple supplied, exceeded the quantity of apples demanded. But at any price below \$1, the quantity of apples demanded was much greater than the quantity of apples supplied. There's only one price, and one price only, where the quantity supplied equals the quantity demanded. I like to think of it as the place where every buyer has a seller, and every seller as a buyer. It's the only price where there's no tendency for change. Up here where the price is too high, sellers would recognize that, and they would lower their price. That would be movement along the supply curve this way. As price would lower, the quantity demanded would increase. If price were too low, suppliers would recognize that, raise their price, and the quantity supplied would rise. As prices go up, the quantity demanded would fall, as prices go up, and again, it would meet in the middle at equilibrium.

That's why equilibrium is so great. It gets us our equilibrium price of a dollar, and the quantity of 3,000 bushels.

So here's what we went over in this tutorial. We talked about the supply and demand. You looked at ceteris paribus. And finally, you got to see equilibrium.

Thanks so much for listening. Have a great day.

Terms to Know
Ceteris Paribus

From Latin, meaning, "holding all other things constant."

Demand

The quantity of goods and services that may be purchased at a given time specific to a set income and range of price levels.

Equilibrium

The point at which the quantity supplied at a given quantity price combination equals the quantity demanded; where the supply and demand curves intersect.

Movements Along Supply (Demand) Curve

Demonstrated when the price of the product changes and impacts the quantity supplied (demanded).

Shifting of Supply (Demand) Curve

Movements that may cause either an increase or decrease in the quantity supplied of a given good or service for a specific price level; the shift occurs due to more or less resource access, decrease or increase in the price of inputs, or changes in regulation (taxes and subsidies). For demand, the changes are typically related to income or preference changes.

Supply

The fixed quantity of goods and services available for a range of price levels at a set point in time.