Video Transcript: Long Term Supply Curve and Economic Profit

Hello, welcome back. In this video, we're going to discuss long-term supply  curve and economic profit. So, let's look at the orange juice market, right? In this example, so we'll look at the supply and demand curve and how this relates to  equilibrium, economic profit, accounting profit, and we're going to also discuss  why demand shifts and show the results of demand shifting, so let's draw our  chart. Okay, okay. Let's put our price points in. Right, this is the price per gallon  for orange juice, $1.50 So, quantity, quantity supplied in millions of gallons per  week, right. So 1. 2, 3, Okay, draw, draw out our supply curve, remember  upward sloping demand curve downward, sloping, so here we're pretty close.  Equilibrium price 50 cents. Okay, so at this equilibrium price, right, equilibrium,  equilibrium. Okay, at this equilibrium price, you can see supply and demand  intersect. Okay, so this shows that supply and demand are equal in the market.  Supply, suppliers are satisfied with the quantity supplied, and the demanders,  the people that the consumers that want the product, they're satisfied with the  current demand at this price point. Both are happy, both will sell and buy at 50  cents per gallon, right. So the market has set the equilibrium price, supply and  demand are equal, and it is 50 cents. The market has determined by the price  going up and demand going up until or down, right, it'll fluctuate until we find the  equilibrium price as we're shown here, right. So the market, or the invisible  hand, the suppliers and the demanders, right, the producers and the consumers  will drive a price until they intersect, and it'll be known as equilibrium, right. Now  at this price point of 50 cents, economic profit equals zero. You might be  thinking, well, what is equal? What is economic profit? Right, so economic profit  represents the amount of additional profit that you incur or that you don't incur,  right, but at 50 cents it's zero, so let's define economic profit. Okay, so you have  sales revenue, right, that you generate from sales, right, and then you have an  opportunity cost. What is opportunity cost? Opportunity cost is what you forego  to develop, produce, and sell orange juice. So any other investment activity that  I forgo to produce orange juice is known as an opportunity cost. Okay. Well,  here at equilibrium at 50 cents, there is not a better investment or a worse  investment for me and my company than to develop and produce orange juice,  right? So economic profit is zero, but let's say that we have a shift in demand,  right. So, if we have a shift in demand, and why would we have a shift in  demand, right? Let's say that we have become a little oversupplied,  oversaturated, right, and a because the supply is too much, right, there's  saturated on the shelves, too much orange juice. Now consumers aren't buying  as much, and our product isn't demanded, right? I'm not just talking about our  product, but I'm talking about all the other orange juice supply. Buyers, let's say  that they stock the shelves full of orange juice, and it's oversupplied, and the  market is saturated. Now, demand for our product is going to shift, right? It's  going to be less demand now, right? We shift this way, right, and now we see  that our equilibrium price is now down here, right? The market is selling orange 

juice for 40 cents. Why? Because there is more supply, right? It's pushing the  price down, and demand has shifted. So you can see at the initial equilibrium  price of 50 cents, we were selling around this point here, right, about 4.5 million  gallons, right at this price point. We are selling about 4.5 million gallons, but  now, because demand has shifted due to unfortunate economic circumstances,  right? That the market dictates it has now created a new equilibrium price,  because demand has shifted this way, right? It's created a new equilibrium price  of 40 cents. Let's switch markers here. Okay, a 40 cents, right, and now we are  only supplying 3.5 million, right, at 40 cents, because demand is shifted because of an over supply, right, so we've shifted here, okay, and we've shifted the  demand curve. The entire demand curve has shifted because of the oversupply.  So now we are selling less quantity, and we're getting a less price because there is an oversupply in the market, right? We can't produce enough, we can't sell  enough, and we're selling at lower prices now. Let's look at the opposite end of  this of the spectrum. Let's say that we have a phenomenon where we all of a  sudden become the premium of the premium orange juice, and nobody else in  the world wants to buy orange juice, but our orange juice, so now demand shifts  further out the supply curve in a positive manner, right. We shift out this way  because we have now greater demand, right. We have greater demand, right.  So we shift this way the entire demand curve because now our product is a  premium product, we are the market leader in the product in the space in the  orange juice market. We're, we're now the dominant player in that space, right?  So now our price point jumps up because people are buying only, or let's say we control 60% of the orange juice market. Well, 60% of orange juice buyers are  buying our orange juice brand, right. So we control a big portion of that revenue  that's coming in from the orange juice market, right. Consumers that are buying  orange juice, we're capturing a lot of that sales revenue. So now, because they  are buying so much, we can adjust our prices up, right. So now we can collect a  premium. Right, we can collect a premium over here. Let's say at 60 cents.  Okay, now we're collecting a premium because people are only buying our  orange juice, or 60% of the orange juice market, per se, is buying our orange  juice. Right, so now our we can not only can we charge more, we're selling  more, right? So now, because of the shift and the demand curve, because of our premium product, we can produce more, and we can sell at a higher price per  gallon, so we can see here that this is the long term supply curve, right, over the growth of our industry, right, so and during the life cycle we can take any one of  these positions, right, and just the market demand and the supply can is always  going to dictate the equilibrium price, but if we can benefit our company and we  can position ourselves well, and we can take market share, we can shift our  demand out, and we can charge higher prices, and we can produce more, right? But if we fall behind the competition, you can see how the demand curve shifts,  right? Therefore, we can sell it at a cheaper - we have to sell at a cheaper price, 

and we sell less, because this is how the market dictates the pricing based upon our product and how well we compete in the market, how much market share  we take, or how little do we have. So that's why it's important to capture as  much market share as you can in order to maximize your profit potential, and  and be able to benefit from charging higher prices as you see the shift this way,  and selling more products.