Market equilibrium | Supply, demand, and market equilibrium | Microeconomics | Khan Academy
Understanding Demand and Supply in the Apple Market
Introduction to Demand and Supply
- The video begins by introducing the concept of demand and supply for apples, setting up a graph with price per pound on the vertical axis and quantity on the horizontal axis.
- Price points are established at $1, $2, $3, $4, and $5 per pound, with quantities ranging from 1000 to 5000 pounds. The analysis is set for a one-week period.
Demand Curve Analysis
- A high price leads to low consumer demand; for example, at $5 per pound, only about 500 pounds would be demanded. This highlights the distinction between 'demand' (the entire relationship) and 'quantity demanded' (specific amounts).
- Conversely, at a lower price of $1 per pound, the quantity demanded could rise to approximately 4000 pounds. The demand curve is illustrated as downward sloping.
Supply Curve Insights
- Suppliers will not produce apples below a certain price point (e.g., 50 cents), indicating that production starts only when prices are viable. At $1 per pound, suppliers might be willing to provide around 1000 pounds of apples.
- The discussion emphasizes that this analysis can apply to various scales—local markets or global apple markets—though it focuses on a small town scenario for simplicity.
Scenario: Price Setting by Suppliers
- If suppliers anticipate selling apples at $1 per pound based on their planning but only supply 1000 pounds while demand is at 4000 pounds, this creates a shortage of 3000 pounds. This mismatch illustrates market dynamics where demand exceeds supply at that price point.
- As consumers bid up prices due to high demand against limited supply, producers may respond by increasing both prices and quantities supplied in subsequent periods. This reflects natural market adjustments over time as shortages prompt changes in behavior among suppliers and consumers alike.
Adjustments Following Market Dynamics
- In response to increased consumer interest leading to higher prices (e.g., rising from $1 to potentially overshooting towards $3), suppliers adjust their production plans accordingly—hoping now to sell around 3000 pounds at this new price point.
Understanding Surplus and Equilibrium in Supply and Demand
The Concept of Surplus
- A surplus occurs when the quantity supplied exceeds the quantity demanded, illustrated by a surplus of 1,700 pounds of apples at a price point that leads to excess supply.
- Producers may respond to a surplus by reducing prices to attract consumers, as unsold apples will spoil over time.
Price Adjustments and Market Dynamics
- As producers lower prices due to surplus, the quantity supplied decreases while demand begins to increase; this movement along the supply curve reflects market adjustments.
- If initial prices are set too high, it results in reduced demand; conversely, if prices are too low initially, it creates a shortage leading to increased bidding for products.
Equilibrium Price and Quantity
- The market converges towards an equilibrium point where the quantity supplied equals the quantity demanded; this is visually represented by the intersection of supply and demand curves.