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Market equilibrium

Explore the dynamics of supply and demand in through an example of an apple market. By graphing the demand and supply curves, you'll learn how different prices impact the quantity supplied and demanded. You'll also learn how shortages and surpluses arise, how they are resolved through price adjustments, and how the market converges on an equilibrium price and quantity. Created by Sal Khan.

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  • aqualine seed style avatar for user Rods Shibs
    Wouldn't it be more beneficial if the supplier priced the apple at $3 but supplies only 1300 apples to prevent a surplus as he will get the most money out of this?
    (24 votes)
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    • piceratops ultimate style avatar for user OEtopia
      You cannot adjust price and quantity at the same time. You have to either fix the price to manipulate quantity or vice versa. Plus, providing this model, firms would want to supply more than consumers demanded at the price of $3. The entire supply curve have to shift to the left until the market clearing price is at $3 to fulfill your condition. This is certainly not 'ceteris paribus'.

      The standard Demand-Supply model assumes a competitive market structure. That is firms are price-taker. They are not capable of fixing price to restrict supply unless they collude or become a monopoly to which is not imply by the model.

      Even if they are able to do so, maximising revenue does not mean your profit is maximised. You have to remember that firms primary objective is to maximise profit, not revenue.
      (32 votes)
  • duskpin sapling style avatar for user Trent Ungard
    This may be a dumb question, but I'm confused as to how we would ever know how much greater demand is than supply? In a practical sense in the real world we could certainly assume if we ran out of apple's fast enough that demand was very high, but to make a chart like the one in the video you need exact quantity demanded points, which couldn't be obtained unless through experience. So at , in real life how would he know demand is 4,000 lbs? Since demand is greater than supply he wouldn't be able to have any data as to how much greater it is, since the apples are still just as sold out. Is it simply speculation?
    (7 votes)
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    • blobby green style avatar for user Sourabh B.
      This whole exercise is done only assuming that suppliers don't know exact demand, and are only acting on market response in a competitive environment. That being said, there is also another assumption which is not mentioned here, which is all agents act "rationally" . That makes them respond to market in "calculated and proportional way".With that assumption, you can make calculated guesses about the demand. But of course, people aren't always rational, that's why we have phenomenon of 'hoarding' , 'panic buying' and other irrational behavior. So you're partially right about not knowing "exact" demand,but for the learning sake, we are making it follow a model.
      (5 votes)
  • female robot grace style avatar for user Strings to Eternity
    So what if I have a monopoly over apples and I always produce such that there ALWAYS will be a shortage!? The prices will rise, but yeah being a monopoly we won't produce more.

    What will happen to the supply and demand graphs then?? Would the supply graph move to the right? (provided everything else remains constant). What about the demand graph, will it more to the right? Or stay as it is??
    (6 votes)
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  • blobby green style avatar for user HI
    Can anyone tell me the difference of demand and Quantity demand?
    (3 votes)
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  • leaf red style avatar for user Synister Saw Yan Naung
    Can the demand curve touch the axis ?
    (2 votes)
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    • orange juice squid orange style avatar for user Owen Sechrist
      Yes, in fact the demand curve MUST touch the axis. This is a function of diminishing marginal benefit (each additional unit is less useful or satisfying than the last) and probably more importantly a function of time.
      Since the demand curve has a time element, only so much can possibly be consumed in a given period of time.
      (2 votes)
  • leaf grey style avatar for user Jules
    Does the equilibrium price guarantee the maximization of profits?
    (1 vote)
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  • mr pants teal style avatar for user SanFranGiants
    Around , do the suppliers/producers set the prices for the apples?
    (1 vote)
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  • blobby green style avatar for user joniball083
    If quantity supplied exceeds quantity demanded, we know what?
    (1 vote)
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  • blobby green style avatar for user sameer sheikh
    watching this video has confused the concepts of supply and demand for me, specifically, supply/demand vs. quantity supplied/demanded -m ovement along the curve vs. shifting of the curve itself.

    yes, i know that a change in price equates to movement up and down the curves. and that changes in other factors (tech/production, tastes, input costs, etc) equate to a shifting of the curves.

    having said that, i'm having a very serious problem in conceptualizing why it's movement along the curve vs shifting of the curve and vice versa. i cannot, and i don't know why, reconcile why it's one way and not the other given whatever the scenario (price change or the other factors.)

    take demand and assume a change in price, well i don't understand why it can only allow for a movement up and down the curve and not a shift in it.

    i mean, ultimately, if you look at a shifting demand or supply curve, you will ALSO get a change in quantity demanded/supplied.
    (2 votes)
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    • orange juice squid orange style avatar for user Owen Sechrist
      I think the reason you're having trouble is because, when everything else remains equal (incomes, preferences, expected future prices, etc...) there is no good reason why the price would change! That is to some degree the point of how properly functioning markets operate.

      But, it is also important to note that firms are not constrained by anything other than the market in setting the price. So a firm COULD raise a price for no reason other than they want to, however, if they did and all else remained the same, there would then be a surplus in the market.

      So when ONLY price and Qd or Qs change, the equilibrium point in the market will not change, it requires some other factor to shift either supply, demand, or both to change the equilibrium point in the market.
      (1 vote)
  • blobby green style avatar for user Liliana Loyde
    I still dont understand how to answer the question.
    Equilibrium in the market-place means that quantity supplied 'Qs' equals quantity demanded 'Qd'.

    Given the following equations:

    Qs = 1,050


    Qd = 2000 – 2.5P

    solve the equilibrium price P
    (2 votes)
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    • leafers ultimate style avatar for user Andris
      This is just an equation of two lines. Their intersection comes from solving them as a system of two equations, which will yield P and Q:

      In this case supply is a horizontal line so we already know Q (whatever the demand, supply will always be 1050):

      Q=1050 - substituting back that to Qd will yield:
      1050 = 2000 - 2.5P, solving this for P:
      950 = 2.5P

      So the quantity is 1050, the price is 380.
      (1 vote)

Video transcript

So, let's say we are in the apple market. What I want to do in this video is think about both demand and supply for the apples at different prices. Let's draw ourselves a little graph here. We already know this right over here, the vertical axis is the price axis, and this we're going to say is price per pound. The horizontal axis this is the quantity. The quantity of apples. Let's put some tick marks here. Let's say that's $1 a pound, $2 a pound, $3 a pound, $4 a pound, and $5, and let's say this is thousands of pounds produce and we have to set a period. Let's say this is for the next week, and so this is 1000 pounds, 2000, 3000, 4000, and 5000. Now, let's think about both the supply and the demand curves for this market, or potential supply and demand curves. First I will do the demand. If the price of apples were really high, and I encourage you to always think about this when you are about to draw your demand and supply curves. If the price of apples were really high, what would happen to consumers? Well, they wouldn't demand much. The quantity demanded would be low. If the price were high, maybe the quantity demanded is like 500 apples. And once again I am being very careful to say the quantity demanded is 500 apples. I'm not saying the demand is 500 apples. The demand is the entire relationship. The actual specific quantity, we call that the quantity demanded. The price of $5 of quantity demanded would be about 500. Maybe at a price of $1, the quantity demanded would be maybe 4000 pounds. Our demand curve might look something like this. Might look something like that. Let me draw it a little bit less bumpy. So, our demand curve might look something like that. I can label it. That is our demand curve. I'll think about our supply curve. Well, there some price below which we aren't even willing to produce apples. Let's say that's like 50 cents. So at 50 cents that's where were even just willing to start producing apples. Let's say if apples ... if the price of apple got to a dollar where the quantity we've be willing to supply is about a 1000 pounds, and it just keeps increasing as the price increases. So this is the supply curve, and when I talk about we, I'm talking about all the suppliers in this market. We could be doing this for a specific supplier. We could be doing this for a specific market. We could be doing for the global apple market. However, you want to view it, but for the sake of this video let's just assume its like our little town that is fairly isolated and all of that. Let's think about what happens in different scenarios. What happens if the suppliers of the apples going into that week for their own planning purposes ... They just think for whatever reason, that they're only going to be able to sell the apples at $1 per pound. Given the supply curve, they only supply 1000 pounds. This is what the suppliers plan for, and this is where they set the price point at $1. One dollar per pound. Now, what's going to happen in that scenario? Well in that scenario they supplied 1000. The quantity supplied is 1000 pounds. Let me write this down. So, I'll do it in pink for this scenario. So, this scenario the quantity supplied is 1000 pounds. What is the quantity demanded? Quantity demanded. This is all the scenario where the price ... the price or the initial price that the growers or producers set was $1 per pound. One dollar per pound. Well the quantity demanded at $1 per pound is 4000 pounds of apples. 4000 pound of apples. What do we have here? Well, here we have a shortage. We have a shortage of 3000 apples at that price point. At a dollar, a lot more people are going to want to buy apples, and the producers just didn't ... I guess they didn't figure that out right. They didn't produce enough apples. Now what will naturally start happening? If you have the shortage ... you have all these people who want to buy apples, and you only have so many apples there, what might happen in the next period in the next week? Well, first of all, those apples that are out there they might get bid up, so, the prices start going to start going up. The prices are going to start going up. People are going to start bidding up the apples. They want them so badly. Their going to start bidding them up, and as they start getting bid up, the producers are going to say, "Wow! There's so many people are running out of apples. We also need to increase the quantity produce." The quantity will also go up. The price will go up. If you look at from the suppliers point of view. The price will go up, and the quantity will go up. They will move along this line there. So maybe in the next period there's less of a shortage, or they move away from that shortage situation. If the price and quantity increase a little bit, so maybe the price goes to $2, and the quantity goes to ... I don't know, this looks like about 1900 ... 1900 pounds, now all of a sudden you have less of a shortage. I think you see that I'm getting to an interesting point over here. I won't go there just yet. I won't go there just yet. Let's think about another situation. Let's think about after this happens. Price and quantity increases so much that essentially overshoots this interesting point right over here. So in the next week the suppliers they'll say, "Wow! People want our apples so badly, let's set the price really high at $3, and at $3 we're really excited about producing apples." So, we the suppliers are going to produce ... let me do this in a color I haven't used yet. We the suppliers are going to produce at $3 a pound. We are hoping to sell 3000 pounds of apples. This is where, maybe, they adjust to the next week. What's going to happen there at a price of $3. That's the scenario right over here. The price of $3. So, the price is now $3 per pound. Well, now the quantity supplied is going to be 3000 pounds. I could write 3000 pounds. What is the quantity demanded? The quantity demanded is now much lower. The price is high now, because the consumers might want to go buy other things, or they can't afford an apple, or whatever it might be. Now the quantity demanded, now that's looks like about 1300. 1300 pounds. What situation do we have now? Well, now we have a much bigger supply then ... or the quantity supply is much bigger than the quantity demanded. Now we face a surplus. So, now we have a surplus. Let me draw that line there. I want to make it clear this is all the same scenario. We now have a surplus of ... what is this? 700 will get us to 2000. We have a surplus of 1700 pounds of apples. Now what happens in a surplus situation? Well, apples won't stay good forever, so maybe the producers get a little desperate. They start selling. They start reducing the price, maybe to start attracting some consumers. They start reducing the price. When they start seeing that the prices are going down, and you have this glut of apples, there're all going bad and not getting sold, the quantity is also going to start going down. They'll produce fewer and fewer apples, so we'll move here along the supply curve. As you decrease the price, what's going to happen to the demand curve? Well the demand is going to go up. Over here the prices was too high, so it's natural for the sellers to lower the price. When you lower the price it also reduces the quantity. We go this way. When you lower the price it increases demand. You go that way. If the price from the get-go were too low, then you have this huge shortage, things get bid up. The prices go up. As the price goes up, the suppliers want to produce more. They move up the curve. As the price goes up then the people will demand less. You see that's it's all converging on a point right over here where the two lines intersect. Let me do that in a ... its all converging right over there. That's the price at which the quantity supplied will equal the quantity demanded. We call this, which looks like for this scenario, maybe about $2.15. Let me just write it there $2.15. We call that the equilibrium price. Equilibrium price is $2.15 a pound. It's the price at which the quantity supplied is equal to the quantity demanded. This quantity supplied is equal to the quantity demanded. That's the equilibrium quantity. That right over here looks like it's right about ... I don't know ... 2200 pounds. 2200 pounds. Assuming that nothing else changes, this is a good scenario for both the consumers and the producers. They keep producing 2200. They charge this price, and everything's happy. All the apples get sold and none of them go bad.