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Supply and Demand Economics

Supply and Demand Economics

Author: James Howard
Description:

This lesson is an overview of supply and demand and economics markets. 

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Hello and welcome to this tutorial on supply and demand economics. Now as always with these tutorials, please feel free to fast forward, pause, or rewind as many times as you need in order to get the most out of the time that you spend here. So the price of gasoline. You ever wonder why it moves around so much? Why it's high one week and lower the next?

Well, supply and demand-- the laws of supply and demand have a lot to do with this behavior. During this lesson, we're going to be looking at supply and demand, economic markets. The key terms for this lesson are going to be market price, equilibrium price, surplus, shortage, perfect competition, monopolistic competition, oligopoly, and monopoly.

The law of demand. Now the law of demand in economic terms is defined as a downward sloping curve on a graph where price is the y-axis and quantity is the x-axis. Now what we're going to see is as price goes down, quantity sold increases. So as a product becomes more available at a lower price, people will tend to want to buy more of it. And therefore, the quantity demanded will go up.

The law of supply on the other hand, is the opposite story. What we'll find here is that as the price increases, more producers will want to get into the market so that will affect how much product will be available in the market because more people are coming in and trying to make a profit on the current price. And as price goes lower, the law of supply says that quantity will also go down.

One of our key concepts we're going to be looking at here in this lesson is the market price. Now this is the current price of a good or service at which a customer is willing to pay. So let's put our supply and demand curves together on a graph.

And we'll set the market price, say, here. This will represent given the current situation what a customer is willing to pay. Now keep in mind, these things are always in flux so you'll never see these things static, like they're represented here. This is just for demonstration.

So let's use this to talk about equilibrium price. Now equilibrium price is the price at which quantity demanded and quantity supplied will meet. So let's set our market price here, the price at which a customer is willing to pay given the supply of a particular product.

What's going to happen because this is where the market price was originally set, the lines will move around until equilibrium is met. And this is the price given the supply and demand curves where price will be at an equilibrium, all other things being equal. So let's talk about surpluses and shortages next.

Now surplus is when there's more supply of a product than demand. And a shortage is when there's more demand for a product than there is supply. This is going to affect the price, obviously. Surpluses will mean lower prices. Shortages mean higher prices.

The size of a business is going to have an effect on how they can cope with this. Larger organizations have more flex, they have more money available, and they're able to look for more substitutions for a product than a small organization or an individual, who's going to find reacting to a shortage much more difficult. Now these can be manipulated artificially.

For instance, Apple Corporation restricting supplies of a new product in order to increase demand. And thereby, being able to charge more money for that product. Opportunity cost is a key concept in economics. Now let's illustrate this using a 24-hour day.

Let's say I spend 10 hours commuting and working. I have eight hours or sleeping. And the rest of it is up to me. How do I spend the rest of my time?

Well, if I spend so many hours eating and so many hours watching TV and so many hours studying, that makes up 24 hours in a day. Well, let's say the what I have planned suddenly equals 25 hours in a day. Well, I can't, obviously, have that. So that means in order to accomplish those other things that I want to get done, I'm going to have to take time out of either working or sleeping. And the time that I take out of there, that missed hour of work or the missed hour of sleep, that represents the opportunity cost that I could have done because I'm doing studying or recreating.

Now economic markets are defined by competition that attempting to sell similar products as other businesses, the people I'm in direct competition with. Now each business in this case is going to see the best combination of price and quality to gain an advantage over their competitors and sell more to the customer.

The first type of market we're going to look at is called perfect competition. Now this is an industry market structure that's characterized by a very large number of firms selling a homogeneous or identical product. And this is highly theoretical. But the closest you'll find to it in everyday life is agriculture.

Rice is rice is rice. And it doesn't matter how much you market it or advertise it. It's still going to be rice. And what happens is the total amount of supply on hand and timing to the market are going to affect how well an industry does in that particular market.

Monopolistic competition is an industry market structure characterized by a large number of firms selling similar products. Take, for instance, clothing or hamburgers. What's key here is going to be differentiation of the product.

I have pickles on my hamburger and you don't. I have flashy lines on my shoes and they don't. And this elicits a gut reaction that makes them perceive the value of one is higher than the other.

An oligopoly is the industry market structure characterized by a few firms selling similar products. Take gasoline, for instance. There's only a few big oil companies out there. Now what's going to happen here is if one particular oil company wants to get a competitive advantage over their competitors, they're going to have to do that through price.

Monopoly. Now this is an industry market structure characterized by one firm supplying a unique product to the entire market. Barriers to entry prevent competition. In other words, it's very, very hard for competitors to get in and sell that same product.

These are very, very rare. And there's very little need here for marketing of the product because you own that particular product.

Up until the 1980s, De Beers Diamonds controlled about 90% of the world's diamond sales. They would simply buy out other mines that competed with them and created this large barrier to entry. Today, they control about 40% of the world's diamonds. And this is mainly through restructuring of their business due to increased awareness of blood diamond sales and things like that.

Also, the cable company in your local area. If they have a contract with your city, they have a government-backed or government-insured monopoly that says that no other competition can come in and offer that same type of product.

So to recap, we talked about supply and demand, the supply curve and the demand curve, and how they react together and affect market and equilibrium price. We also talked about the four types of economic markets. Perfect competition, monopolistic competition, oligopoly, and monopoly.

I want to thank you for spending some time with me. Have a great day.

TERMS TO KNOW
  • Market Price

    The current price of a good or service which a customer is willing to pay.

  • Equilibrium Price

    The price at which quantity demanded and quantity supplied meet.

  • Surplus

    When there is more supply of a product than demand.

  • Shortage

    When there is more demand for a product than supply.

  • Perfect Competition

    An industry market structure characterized by a very large number of firms selling a homogeneous (identical) product.

  • Monopolistic Competition

    An industry market structure characterized by a large number of firms selling similar products.

  • Monopoly

    An industry market structure characterized by one firm supplying a unique product to the entire market. Barriers to entry prevent competition.

  • Oligopoly

    An industry market structure characterized by a few firms selling similar products.