Speaker A
Mr. Clifford: I'm Mr. Clifford, and this is Adriene Hill. Welcome to Crash Course Economics. Let's start by talking about something that most people take for granted.
An introduction to supply and demand, explaining markets, voluntary exchange, price signals, and how supply and demand curves determine prices.
Key Takeaways
- Markets rely on voluntary exchange where both parties benefit.
- Price signals efficiently allocate resources in competitive markets.
- Supply and demand curves explain how prices adjust to balance markets.
- Equilibrium price is the point where supply equals demand.
- External forces can shift supply or demand, impacting prices and quantities.
What the video covers
- Markets are places where buyers and sellers voluntarily exchange goods and services, creating win-win transactions.
- Voluntary exchange occurs when both buyer and seller value what they receive more than what they give up.
- Competitive markets efficiently allocate scarce resources through price signals that guide production and consumption.
- Supply and demand curves illustrate how prices and quantities adjust to balance buyers' and sellers' interests.
- The law of demand states that as price rises, quantity demanded falls, and vice versa, shown by a downward sloping demand curve.
- The law of supply states that as price rises, quantity supplied rises, and vice versa, shown by an upward sloping supply curve.
- Surpluses occur when price is too high, causing excess supply; shortages occur when price is too low, causing excess demand.
- Equilibrium price is where quantity demanded equals quantity supplied, balancing the market.
- External factors, like weather, can shift supply or demand curves, changing equilibrium prices and quantities.
- Prices reflect voluntary exchange and market signals rather than notions of fairness; consumers can choose where to spend their money.
Chapters
- 00:00Introduction to Markets and Voluntary Exchange
- 02:14Markets and Labor: The Chain of Production
- 04:12Market Efficiency and Price Signals
- 06:12Supply and Demand Basics
- 07:31Surpluses, Shortages, and Market Equilibrium
- 08:31Shifts in Supply and Demand and Price Changes
- 09:41Price Fairness and Market Choices
Full Transcript — Download SRT & Markdown
Speaker A
Adriene: Is it grocery stores, is it the census, is it GPS, is it goldfish, is it frogs? Oh, it's probably these strawberries, right?
Speaker A
Mr. Clifford: No, I was gonna say markets.
Speaker A
Adriene: But strawberries are great.
Speaker A
Mr. Clifford: Yeah, but where do you think strawberries came from?
Speaker A
Adriene: The ground, the farmer, the market, the grocery store, the miracle of life?
Speaker A
Mr. Clifford: Now look around you. Where did all that stuff come from? And who made it? And why? Well, the answer is simple, but it's underrated. It's markets, and for most of us farms and factories and stores, but mainly it's just markets. Can I have a strawberry now? [Theme Music]
Speaker A
Adriene: So a market is any place where buyers and sellers meet to exchange goods and services.
Speaker A
The key to markets is the concept of voluntary exchange. That is, that buyers and sellers willingly decide to make a transaction. Let's say you go to a farmer's market and you buy a box of strawberries for $3. You value the box of strawberries more than the $3 you gave up to get it. The seller valued the $3 more than the box of strawberries. The transaction's a win-win because you got your strawberries and the farmer got his money. You both felt better off; that's voluntary exchange.
Speaker A
This same process happens in the labor market. Say that instead of the farmer's market, you bought your strawberries at your local supermarket. The cashier voluntarily decided to work there. He values the $10 an hour he makes there more than he does sitting at home watching The Walking Dead. At the same time, the owner of the store values the labor of the cashier more than the $10 an hour she pays him. And so it goes, on and on, all the way up the chain of production, from the driver that
Speaker A
delivered the strawberries to the farmer that grew the strawberries to the tractor that the farmer purchased. The point is that markets are everywhere and most are based on voluntary exchange.
Speaker A
Mr. Clifford: The part of all this that most people take for granted is how efficient the system is. Competitive markets turn out to be pretty great about allocating or distributing our scarce resources towards their most efficient use.
Speaker A
So if farmers produce, like, too many strawberries, then the price will fall as sellers try to sell them off. Lower prices mean less profit for the strawberry farmers, and those farmers will have an incentive to produce something else like lettuce or Brussels sprouts. So if farmers don't produce enough strawberries, buyers will bid up the price and the farmers will have an incentive to produce more, which then drives down the price. That's like magic except it's not.
Speaker A
The information that markets generate to guide a distribution of resources is what economists call price signals. Markets also incentivize the production of high-quality products. If the strawberries are brown and nasty, then no one's gonna want to buy them, and if the tractor's a piece of junk, the strawberry farmer's gonna tell other farmers to buy some other tractor. Now, ideally the eventual result of voluntary exchange is that sellers can't make themselves
Speaker A
better off without making something that makes buyers better off. Businesses, and in particular large corporations, are often villainized as greedy, heartless institutions that take advantage of consumers, but if markets are transparent and buyers are free to choose, then businesses will have a hard time taking advantage of people. Now obviously greed and deception happen in real life, and there are situations where
Speaker A
consumers don't have a choice, but for the most part, if you really don't like the policies or practices of a particular company, then don't shop there. After all, in the free market, every dollar that is spent signals to producers what should be produced and how it should be produced.
Speaker A
Adriene: We've established that prices and profit determine where resources should go, but where do prices come from? Who determines the price of my box of strawberries? To answer
Speaker A
that, we're gonna draw—get ready for it—supply and demand. Let's go to the runway.
Speaker A
Mr. Clifford: If there's only one thing you should learn in economics, it's supply and demand. Let's use the market for strawberries to help us understand this concept. Up here on the Y axis, we have the price of strawberries, down here on the X axis we have the quantity of boxes of strawberries. Let's start by looking at buyers and how they respond to a change in price. If the price
Speaker A
goes up for strawberries, then some buyers will go buy blueberries or they'll go on that all bacon diet. The point is, they're gonna buy fewer strawberries. And if the price goes down for strawberries, then people are gonna buy more. This is called the law of demand: when the price goes up, people buy less; when the price goes down, people buy more. On the graph it's shown by a downward sloping demand curve.
Speaker A
Now let's think about sellers like the farmer in the farmer's market. If the price of strawberries goes up, then that farmer will make more profit, so will have an incentive to produce more strawberries. If the price goes down, then he's not gonna want to produce strawberries. That's called the law of supply, and on the graph it's shown by an upward sloping supply curve. Now let's put supply and demand together. If the price is really high at $10, then producers
Speaker A
would like to produce a lot of strawberries, but consumers won't want to buy them. This mismatch is called a surplus. And if the price goes down for strawberries, let's say down to $1, then buyers want to buy a whole lot, but producers won't have incentive and they'll produce very little. At the end you have a mismatch, but this one's called a shortage. And there's only one price where the quantity that buyers want to buy is exactly equal to
Speaker A
the quantity that sellers want to sell, and it's right here where supply equals demand. The price is called the equilibrium price, and the quantity is called the equilibrium quantity.
Speaker A
Adriene: Okay, sure your graph makes sense, but the price of strawberries isn't always $3; sometimes it goes up to $6, and at Whole Foods, local, artisanally grown strawberries, the fancy fancy strawberries, can cost upwards of $12. But I guess Whole Foods is a whole
Speaker A
other world where price has nothing to do with realistic economics. We'll stick to normal strawberries. In fact, the prices for all sorts of stuff change all the time. External forces can shift both the supply and demand curves, changing the equilibrium price and quantity. For example, let's assume that this graph shows the demand and supply of strawberries in the summer. What happens in the winter? Will the change in weather
Speaker A
affect buyers' demand? Or producers' supply? Spoiler alert: it's supply. Colder temperatures make it harder to grow strawberries. The result is the entire supply curve is gonna shift to the left. This is because at all possible prices, there'd be fewer strawberries produced. That's it. This graph is just a tool that economists and everyone else use to show the results of a change in a market. I know it seems complicated at first, but there are really only four things that can happen in a market.
Speaker A
Supply can decrease, supply can increase, demand can decrease, or demand can increase. Some people might wanna talk about a price being fair or right. Well, that all depends on your point of view. The buyer always considers a low price to be a very fair price, while the seller considers it unfair and vice versa. In general, economists don't really like to push opinions about prices. Voluntary exchange suggests that the price is there for a reason.
Speaker A
For example, assume the demand for strawberries inexplicably falls, so the demand curve shifts to the left and the equilibrium price and quantity fall. Farmers might go to the government for assistance, but most economists...
Speaker A
allows you to pay whatever you want monthly to help make Crash Course free for everyone forever. Thanks for watching. DFTBA.
Topics:economicssupply and demandmarketsprice signalsequilibrium pricevoluntary exchangescarce resourceseconomic incentivesmarket efficiencyCrashCourse Economics
