Video Transcript: Market Equilibrium

Hello, welcome back. We're going to discuss market equilibrium in this video.  First, we're going to talk about a situation where quantity supplied and quantity  demanded are not equal, and how this will affect the price, right? And what will  we learn about each of these scenarios, and what they do, or how the firm will  react as far as altering their supply and demand, and we'll talk about how the  market will shift and bring itself into equilibrium through the invisible hand of the  market. But naturally, it's the suppliers, right, and it's the consumers or those  that are demanding the product that will bring the price into equilibrium, but we'll  cover a few scenarios, showing you different situations and how prices are  affected, supply and demand are affected. Right. So until prices come into  equilibrium and the market supply and demand are satisfied. So, here, let's talk  about. All right, this is this is the Apple market this time, right? We'll we'll just use uh use the Apple market, right? Seems like it'll be better. So we're going to look  at supply and demand here. So let's draw our supply and demand curves. First,  here is our demand curve, okay, and here is our supply curve, okay. Now. Now,  let's look at supply and demand in this scenario. So, we'll look at prices. The  price at $1 Okay. First, let's look over here. I need to put this price per pound.  Okay, five. Okay, and then we're going to look at quantity supplied in the 1000s.  Okay, so at the $1 price point per pound in this market, the quantity supplied. So remember that at the $1 price point, most manufacturers, producers, suppliers  are not going to want to sell a lot of their product at $1 right? That's a very low  price point considering other market prices, right? So our quantity supplied will  be at 1,000 or 1,000 1000s or a million, right? So this is quantity supplied in the  1000s, right? So this will be a million, right? So at a million, okay. This is the  supply at $1 Quantity demanded, okay, is 4000 or 4 million, okay, right? Millions. Now, why is demand greater than supply here? Right, so supply and demand in  this scenario. Right, demand is greater in this scenario. So let's plot these.  Right. So the quantity supplied. Okay. Here at $1 Okay. Quantity. Notice this is  our supply quantity demanded is 4 million at $1 Bring this curve down a little.  Okay. Okay. Now we have a shortage in supply. We have a shortage in supply  because we want demand and supply to be equal, so that we can find the  equilibrium price. Right? Obviously, at the $1 price point, supply and demand  are not equal. Right? Because we have the amount supplied at 1 million, and we have the amount demanded at 4 million. So obviously, the market for apples  here is not in equilibrium, right? And there's a shortage, right? So you see this  gap here. This gap here represents a shortage. Okay, we're going to represent a shortage there, right? Of 3 million, right? So a shortage of 3000 1000s or 3  million, so we have a shortage in supply of 3 million. So, so what's going to  happen next, right? So, what do you think any rational firm would do, right? If we are only supplying a million apples, right, or a million pounds of apples at $1 but  but the but the demand, right, is way out here, right? So at $1 the the demand is way greater than the supply, right? So what is a company naturally going to do? 

They're going to want to shift their prices up, right? So as they shift their prices  up, right? So let's say at, for instance, at $2 now, okay? At $2 we can supply 2  million, right? And the demand will shift up as well to 3.5 million. So now the  shortage is only is going to shrink to 1.5 million. Is the shortage now? See the  shortage got less as the firm charged more for apples, so it charges $2 The  price goes up. Well, so now demand is less because now consumers have to  pay more money for the product, right? So now naturally, people that were  gonna buy apples at $1 they don't want to buy apples at $2 So at $2 price point,  they'll walk away from the market and they'll go spend their $2 on something  else that provides more utility or more benefit, right? So here at $2 you can see  that we are still at a shortage. Okay, so now what do you think the next most  logical thing that a company would do right. They will raise their prices again,  right? So now, let's say we raise. Now they overshoot the market, right? And  they say, "Oh, we got $2 out of the apples. What can we? What if we charge  four? What's going to happen? Right. So let's see. They so they charge $4 What happens to supply? They want to supply more. They want to supply more, right? So they're supplying at $4 They're going to supply 4 million, right? So over here,  we'll write supply 4 million. Okay. Now at $4 what happens to the demand? The  demand goes down here at this point. At this price point, now demand is only  about 1.5 at the $4 price point. Right at the $4 price point, demand is 1.5 million. Okay, so we still now we had a shortage. Now we have a huge surplus, right?  We have a huge surplus at the $4 Okay, so if we're oversupplying now, now  we're 1.5 million units oversupplied. We've saturated the market, right? We've  over we've overstocked the market. We're charging too much, and at $4  consumers don't want to spend $4 per pound on Apples when they could have  spent $2 per pound six months ago, right? So now even more consumers are  going to walk away from the market, right? So we really want to avoid the  shortage, right? And we want to avoid the oversupply, right? We don't want to be oversupplied, right? We don't want to have a shortage, right? In Supply because demand is too great because our price point's too low, so this is what I'm talking  about when I mean that the market shifts into equilibrium. Right. So as this  scenario draws out, the market itself, the suppliers, and the consumers or the  ones demanding the product are going to naturally balance itself out because  you you don't want to have a shortage and you don't want to be oversupplied.  So naturally, the price is going to shift until both supply side and demand side  are equal, right? Until they're both satisfied with the amount consumed and the  amount produced, when the amount consumed equals the amount produced,  then you have a market in equilibrium. So naturally, at these price points, right?  So let's say we shift the price down to $3 right? So we shift the price down to $3  We are still oversupplied, right? Because at the three-dollar price point, we've  got a 2.5 demand, right? At the $3 price point, so our demand is 2.5 million  right? And our supply is 3.75 million. We are still oversupplied now. At this price 

point, we are oversupplied. Okay, by 1.25 million units. Right, we're still  oversupplied. So what does the firm do next? Okay, we have all of these apples  on the market that's oversupplied by 1.25 million, and now they're spoiling, and  we're losing money, even though we're charging more. Right, we're losing that  revenue because now we're having all of these apples that are on the market  and they're going spoiled, right? So now we can't sell them, right? So now  what's next? We've we've raised prices, right? We've we've come out initially.  We were very low, right? We sold a lot, but we didn't produce enough, right? We maxed out our our sales and everything that we produced, but it didn't meet the  demand, so we we raised our price even higher, right? So as we raised our price even higher, then it shifted to an oversupplied position, and now we have waste  and an absorption or decay of revenue, right? So so the revenue then is not  maximized, right? So therefore, your profit's not maximized because we're  oversupplied and we can't move those units, right? So naturally, what happens  next? The market will finally shift into equilibrium. It can visit every one of these  price points. It can visit every one of those price points until we finally see supply equal demand. Okay, we want to see supply or quantity demanded. We want to  see quantity demanded, right? We want to see quantity demanded equal  quantity supplied. Okay, this needs to equal, and when this equals, we have a  state in the market again, equilibrium. Right? We want the market to be in  equilibrium. The market will naturally shift itself into equilibrium as we are in a  free market environment that producers can produce what they want under  government rules, and consumers can consume what they want under  government rules. And in a free market, prices will naturally shift until they  become in balance into equilibrium. And at this point in this graph, our  equilibrium price is approximately $2.50 right? $2.50 and our quantity supplied  be about 3.1 million units. So at 3.1 million units at $2.50 per pound, our market  has finally found equilibrium. So because the graphs for demand-supply curves  both have price on the vertical axis and quantity on the horizontal axis, the  demand curve and supply curve for a particular good or service can appear on  the same graph. Together, demand and supply determine the market price and  the quantity that will be bought and sold in the market. The equilibrium price is  the only price where the plans of consumers and the plans of producers agree  that is where the amount consumers want to buy the product, quantity  demanded is equal to the amount producers want to sell, quantity supplied. In  other words, this common quantity is called the equilibrium quantity. At any other price, the quantity demanded does not equal the quantity supplied, so the  market is not at the equilibrium price. The word equilibrium means balance. If a  market is at its equilibrium price and quantity, then it has no reason to move  away from that point. However, if a market is not at equilibrium, then economic  pressures arise to move the market toward the equilibrium price and the  equilibrium quantity, as we have showed in shown in this example.