Using the Supply and Demand Curves to Find Equilibrium
3. The Market Forces of Supply and Demand
Using the Supply and Demand Curves to Find Equilibrium - Video Tutorials & Practice Problems
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Let's put supply and demand together on one graph and see what happens.
1
concept
Equilibrium
Video duration:
4m
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Alright. So now we have the tools to analyze supply and demand together on one graph we're gonna see how different price levels can affect the amount of quantity demanded and quantity supplied as well as see how markets tend to move towards equilibrium. So I use this word equilibrium and it really just means balance. We're gonna try and balance the market. So what does it mean for the market to be in balance? That is gonna be when the quantity demanded equals the quantity supplied. So the amount that people are willing to buy in the market is the same amount that the producers are willing to supply to the market at that price. Cool. So there is gonna be this equilibrium and at that equilibrium we're gonna have an equilibrium price and then equilibrium quantity. Right? So at this price we're gonna call it P Star, this Star means equilibrium. Right. That's the that's the notation that we use for the equilibrium price. And at that price, quantity supplied is gonna equal quantity, demand it. And the same thing with equilibrium quantity. We're gonna use a Q Star to tell us that it's the equilibrium quantity and this is gonna be the quantity at that price. Right. So I think it's gonna be really easy to see this on the graph. So let's go down here. Now if you guys were going to guess where equilibrium was on that graph, where would you guess? This would be my first guess. And I'm hoping that it was your first guest too. It's gonna be right here where the lines intersect. Right? So let's go ahead and label our graph. Right? We have our price axis here are quantity access over here. Right? And which line is supply and which line is demand? So demand. You remember demand? We've got the demand downward the double Ds. We know that this is our demand line right here and this is our supply line going up. And at that point where they intersect that is our equilibrium point. So at this point, let's notice a few things, notice what the price is here, We've got the price of six which is going to be what we call p star, right, equilibrium price. And let's go down on the quantity for each of the graphs let's look at the quantity supplied and the quantity demanded at this point. Well, at this point, right, We see on the red line, if we go down from that point We're gonna see a quantity of 10. Right? And that's the quantity I'm gonna put equals quantity supplied as well. As if you look on the blue line going down from that point, we're at the same point right. Which equals quantity demanded as well. So that is our cue star here at 10. Right? So we found our our equilibrium price and are equal equilibrium quantity by the intersection of the two lines on the graph. Pretty easy. We can also find equilibrium on a schedule like we have on the right here. So notice I've got our prices for Supreme Pizza and by the way, this is the same information that's on the graph, I've graphed the information from the schedule. Um and we're gonna find the same equilibrium in this schedule. So notice the way to find it here in the schedule is to find where the quantity supplied equals the quantity demanded. Right? And that was our definition of equilibrium. So let's look at all the different um quantity demanded and the different quantities supplied at the different prices. And you'll find that at a price of $6, we are going to have equal quantity supplied and quantity demanded. And that's exactly what we found on the graph as well. Right? So we've got our P. Star right here of $6 and our Q star is going to be these 10 units. Cool. I hope that makes sense. It shouldn't be too hard to find equilibrium. Um Let's go ahead and move on to the next video.
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concept
Law of Supply and Demand
Video duration:
1m
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So we have what some books called the law of supply and demand. It's not as big of a concept that's pushed as like the law of supply and the law of demand that we covered earlier. But it's it is a good idea to kind of have in your head, just to understand the logic, and this law of supply and demand talks about basically that where the price is gonna constantly just trying to find the equilibrium price. Okay, so let's do an example here, as if we were in this situation in the market, right? Let's say that we're in the market for pizzas in your town, and we know the equilibrium price here being six, but the price was set too high to about eight, right? Um So in this situation at this price, they were supplying way too much, there was all this excess supply and all the suppliers had all these extra pizzazz lying around and they're like, what do we do with these pizzas? Let's lower our price, so we can get rid of the pizzas, Right. So they go ahead and they're like, all right, let's do a sale, we're gonna sell all these pizzas half off, right? So they get the sale and now they have a half off sale with all the pizza, and they end up somewhere down here, and they're like, whoa, now people are buying way too much pizza, we could probably be charging more money for these pizzas. So you can see what could happen, they're eventually gonna rise the price and see if there's still a shortage or a surplus, right? And eventually the market is going to find this equilibrium Of $6. Cool. So that's the idea of the law of supply and demand is that it's gonna kinda constantly adjust until it finds this equilibrium. Cool, let's move on.
What happens to our equilibrium when we start shifting curves?
3
concept
Demand Shifts
Video duration:
6m
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So now we can see how shifts in demand or supply are going to affect our equilibrium price and quantity. All right, So, um we're gonna start with demand here, but we're also gonna see how supply shifts are going to affect equilibrium price. And then we're also going to see how shifts in both. We're actually gonna shift demand and supply on the same graph. So that'll be pretty interesting. But these are the steps that we're usually gonna follow here on the right. Um These are the steps we're going to follow when we're doing these analyses. So, step one is, you know, the problem is going to give you some sort of information about, about the situation, right? They could say that consumer income is increasing or a natural disaster occurred. Right? So, your first job is to take this information and say, is this going to affect demand or supply? Or sometimes the event could affect both. Then we are going to decide which direction to shift. Right? If we've decided that it affects demand, was it a good thing for demand or a bad thing demand? Right. Are we gonna shift to the right or the left, then what we're gonna do is use this notation. Remember the P two, Q two and P one. Q one. So, we're gonna find this new price and quantity. These are gonna be our new equilibrium price and quantity and we're going to compare it to the original price and quantity, P one and Q one. So let's go ahead to the graph here and do an example. So you can see how these steps work uh in action. First thing I want to know about this graph is that now I'm only using one color for demand and supply. Right? I'm just gonna use blue. And the reason here is that by now you guys should feel pretty comfortable that demand is gonna be the downward run downward line. Right? We've got demand downward the double D. S. You guys can't forget that right? Supply. Just it's the other one. So what I wanna do, the reason I'm doing one color is because it's a lot easier to analyze the change if you see, okay blue is my original lines and I'm gonna use red for my new lines. And then it's a lot easier to say, oh this is the new supply because it can get hairy once we're drawing a lot of lines on the same graph. So let's go ahead and label our axis here. We've got our price, our quantity, our demand line and our supply line, right? Um So what I want to do first is I'm gonna label our original um equilibrium right here, I'm gonna put a circle and we're gonna have a notation for our original equilibrium versus our new equilibrium to help us distinguish one from the other as well. So this was our original equilibrium and I'm gonna use P. One and Q. 12. No no take that on the graph here. So we've got Q. One here and P. One over here, right? And now let's say something caused demand to shift to the right, say consumer preferences for the product um increased, right? So we're gonna shift our demand curve to the right and I'm going to use red for my new demand curve so that we can see different from the original situation. So I'm gonna move my demand curve out here And I'm Gonna label it d. two. So we should call them D. One and D. Two. Um That also helps us distinguish one from the other. Right? So I'm gonna always use one for the original situation and two for the new situation after the changes. Cool. So we've got our new demand line there in red. So let's go ahead and find our new equilibrium. And what I like to do is for the old equilibrium equilibrium, we're gonna use a circle. And for the new equilibrium we'll use a square. So I'm gonna go ahead and at this point I'm gonna draw a square around it. And this helps me see the difference right now I can easily pinpoint the original one and the new one, the circle and the square, you can use any any system you like. But this this works for me, so I'm gonna go ahead and at this point I'm gonna find my new quantity and my new price. So our new equilibrium quantity we can see here is that Q. Two, And our new equilibrium price is at P. Two. So a lot of times what a question will ask you is, okay, whatever demand shifted to the right, what happened to equilibrium price and quantity usually don't have numbers to deal with it. You're just gonna say something like equilibrium price has gone up and equilibrium quantity has gone up, right, And we know that from our analysis here on the graph that we've got this new quantity and this new price. Cool, let's do the same thing with a shift to the left down here. So we're gonna follow the same steps, let's go ahead and label our axis P. Q. In alphabetical order, left to right, downward demand, upward supply. Cool. And let's go ahead and put our original equilibrium price and our original equilibrium quantity here on the side, yep. And let's say that demand is shifting to the left now, right? So let's say that the price of a complimentary good has increased, right? So the complementary goods prices, increased demand for this product is going to shift to the left. So let's go ahead and put that in here. We've got our D. One and R. S. One, right? So let's put our D. Two in here, which is gonna be aligned, let's say over here And we'll call that d. two. And it's pretty clear where our new equilibrium is right here, where the new line crosses the old line, right. Cool. So let's go ahead and find our new equilibrium quantity and our new equilibrium price. And we're gonna see that the price has decreased and quantity has also decreased, right? So we'll see in situations where everything is held constant except demand shifts to the left. We're gonna see that price decreases and quantity decreases as well, and that's gonna be consistent for all problems where this graph occurs. Cool. So let's go ahead and do the same thing with supply shifts.
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concept
Supply Shifts
Video duration:
3m
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Okay, let's do the same thing here with supply. So now we'll hold the demand line constant and we're gonna move the supply line to the right or the left right. So let's go ahead on the graph. We'll label our axes P. And Q. We've got our downward demand and our upward supply, right? This will be D. One and S. One. And let's go ahead and use red uh to make our new supply line shifting to the right. So this could be some situation, let's say technology increased in the industry. So we've decided that the supply line is going to shift to the right. So let's go ahead and draw this on the graph. And then we'll find our prices and quantities. So I'll draw my new supply line over here as to I'm gonna do my my my square here from my new spot and my circle for my original, let's go ahead and find our original price and quantity and our new price and quantity. So supply is shifted to the right, Our original price and our original quantity here, P. One and Q. One. And now let's go to the square our new equilibrium which is somewhere around here at P. Two And Q. two. So what has happened in this situation when supply shifted to the right, we had our equilibrium price decrease and our equilibrium quantity increase. And that almost seems a little logical to me, I guess the supply shifting to the right, It's more efficient, they're able to make it a better price and uh they're able to bring more to market. I don't know, there's some logic there that kind of sits in the back of my head but it's just always easier to just see it on the graph and you can't get it wrong right, if you look at it on the graph we are gonna get it right every time. Let's do the same thing with the supply shift to the left over here. Alright, cool. Let's go ahead and label our axis. We've got price quantity, notice I do this every time because I'm trying to drill it in, we've got our downward demand D one upward supply s one. Cool. Alright. And let's go ahead and say that in this situation um our input prices increased, right, the price of gasoline increased and we use gasoline to run our machines. So we're gonna shift our supply line to the left and find our new equilibrium price and quantity. So I'm gonna draw the shift to the left here, something like that, that'll be S. Two. And let's mark our old equilibrium and our new equilibrium right here was the old one where the blue lines cross and here's the new one with the new line right there. Cool, let's compare our equilibrium. So here was our original equilibrium quantity and our original equilibrium price. And let's see what happened to the new equilibrium, we've got an equilibrium price here and equilibrium quantity here. So what happened in this case we're gonna see that the price has increased and the quantity has decreased. Cool. Alright, so these are all the different one sided shifts that we can do. Let's do some practice problems before we move on to two sided shifts. Alright, let's do it.
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Problem
Problem
If the economy booms and incomes rise, what happens in the markets for inferior goods?
A
Prices and quantities both rise
B
Prices and quantities both fall
C
Prices rise and quantities fall
D
Prices fall and quantities rise
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Problem
Problem
A change in which of the following will NOT shift the demand curve for ice cream?
A
The price of frozen yogurt
B
The price of ice cream
C
The price of ice cream cones
D
The income of ice cream consumers
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Problem
Problem
A decrease in _________ will cause a movement along a given supply curve, which is called a change in __________.
A
supply, demand
B
demand, supply
C
demand, quantity supplied
D
supply, quantity demanded
8
Problem
Problem
Gum and mints are substitutes. If the price of gum increases, what happens in the market for mints?
A
The supply curve shifts to the left
B
The supply curve shifts to the right
C
The demand curve shifts to the left
D
The demand curve shifts to the right
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Problem
Problem
Which of the following situations would lead to an increase in the equilibrium price of carrots and a decrease in the equilibrium quantity of carrots sold?
A
An increase in the price of hummus, a complement to carrots
B
An increase in the price of celery, a substitute for carrots
C
An increase in the price of fertilizer, an input for carrots
D
An increase in consumers' incomes, assuming carrots are a normal good
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Problem
Problem
The discovery of a new fertilizer will shift the ___________ curve for carrots, leading to a ___________ equilibrium price.
A
demand, higher
B
demand, lower
C
supply, higher
D
supply, lower
When both supply and demand shift on the same graph, things become a little... ambiguous...
11
concept
Both Shift - Warning!
Video duration:
7m
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now we're gonna study are most involved analysis of supply and demand, where we're gonna shift both supply and demand on the same graph. So this is gonna be pretty exciting. We're gonna be making two shifts on the same graph. And I want to make a quick note whenever we move, whenever we move both supply and demand on the same graph, we are always gonna have one of our variables price or quantity ambiguous. So one of them, we're not gonna be able to tell whether it goes up or down whenever we move both supply and demand. Okay? Um and we're gonna see why that is in a second. But first I want to show you the correct way to draw curves when you are shifting both because when you shift both it does make a difference how far you shift each curve. Alright, so let me show you this example here, I'm gonna show you two incorrect ways to do it and show you why we get different answers when we do it each of these ways and then I'll show you the correct way the way I like to do it. So it's really hard to mess it up. So here we go, let's do the first one. Um In all of these situations we're gonna be shifting supply to the right and demand also will shift to the right, okay. Um But whatever I'm doing here, it holds true for shifts to the left. Mixed shifts of right and left. Um So first I want to draw a situation where I'm gonna shift the supply curve really far to the right and the demand curve just a little bit to the right. Okay. So I'm gonna shift the supply curve way to the right. This exaggerated shift all the way over here. Okay. And I'm gonna shift the demand curve to the right as well, but I'm only gonna shift it just a little bit. So this tiny little shift comparatively. Right? So let's see what has happened to our equilibrium price and quantity in this situation, we started here where we had a price of P. One and a quantity of Q. One, right price axis quantity access. Um And now let's see where we are in our new situation and see how easy it is to see our new equilibrium. Even though we've got all these lines on the graph, it's gonna be where these two red curves intersect, right? Those are the new lines that we drew our new situation. So let's see what's happened here. It appears that our equilibrium price has decreased and it appears that our equilibrium quantity has increased. Right p. two. It looks like it's decreased. Right? I'm gonna put a question mark here because I don't want you to get confused later. That is not gonna end up being correct. And then we've got a quantity increase here. Right? So now let's see this next situation. I'm gonna do something similar except this time I'm the only shift supply a little bit and demand a lot in this one. So let's go ahead and start with demand and shifted a lot, I'm gonna shift it way out here, right? I did away way big shift in demand and a tiny shift in supply. This little baby shift in supply. Cool. Let's go ahead and analyze our points now. So this was our original equilibrium where we had this price and this quantity. And now lets look at our new equilibrium and notice in both of these cases we have shifted both to the right, okay, but we're gonna get a different answer in this case, look what has happened to our equilibrium price. Our equilibrium price in this case looks like it has increased and equilibrium quantity again looks like it has increased. Okay, so something about equilibrium quantity seems like we're doing it right, Let me get out of the way, just so you see the whole thing, right? But the big deal here is that our equilibrium price in one graph decreased and in the second graph it increased. So what is happening, we don't know in the end, we're gonna learn that this price variable is actually ambiguous and we can't make uh an actual conclusion about what has happened to price. So let me show you the correct way to put this on the graph and it will help you not make this mistake. So here let's go on to this last graph. I think there's space for me here. Alright, cool, so let's go ahead and in this one, whenever we have shifts in both, what I like to do is I shift them both an equal amount. Okay. So what I'm gonna do is shift the demand and supply as equally as I can, and then there's a good test to see if you did that, right? So I'm gonna shift this about this far to the right for our demand and about this far for our supply, right? So I did approximately a good job here. What what can tell you that you did a good job is you're gonna get this square right? You're gonna get this square. Let me do it in a different color. I'll do it in green this square and you want it to be as even as possible. All right. You want this square to come out as even as possible. Um And you'll get a good answer. Okay, so in this situation I didn't do it exactly. Perfect. But it's good enough for our analysis. So let's go ahead and label our original equilibrium and our new equilibrium right here. Cool. So the idea is that now the the price looks just about the same as where it was, right? It's just about where it was. It kind of looks like it went up a little bit because of how I drew it. But the idea is by drawing it like this, I can tell that it didn't, it definitely didn't change very much and that's how I know it's gonna be the ambiguous variable. Whereas our quad, he clearly has increased. There's no way to be ambiguous about this quantity definitely went up from Q. One to Q. To the price is very close to each other, right? If I had drawn both prices, they would have been something like that. And that's how I know it's ambiguous. The Q. Is certain right? We can totally tell that it's moved up but the price is very close to where it originally was. So I know that that is the ambiguous variable. And when I write this out, different teachers are gonna have different notation. Um Some might even write out the whole word ambiguous but to save space and time. I'm gonna do P question mark for when the price is ambiguous or Q. Question mark for when it's ambiguous. I've seen teachers use this this kind of double sided arrow for ambiguous meaning. I don't know which way it's gonna go left or right. So the same thing for quantity with that double sided arrow or something like they'll just write p ambiguous or unsure or not enough information. Right. Same thing Q ambiguous. So in this situation, what did we have, we had a situation where P was ambiguous and Q increased. Cool. So that was our answer for this question. If they were to ask us what had happened in this situation. Um Let's go ahead and analyze all the different combinations of shifts to the left and the right. And you'll see that there is kind of a pattern um when when we're doing the double shifts. All right, let's do that now.
12
concept
Results of Both Shifting
Video duration:
6m
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now let's see what happens in all the different combinations of double shifting with supply and demand. So I've got our same steps listed here, right, We're not really gonna use them on this page, but it's just this is kind of the same process that we've been following. Um But let's go ahead and start with this one here on the left. Supply is shifting to the left and demand is shifting to the left, right, I'm just gonna shorten it here. Supply, left, demand left as well. Alright, so let's go ahead and draw our new curves here. Um I use red as usual. So our new demand curve to the left and remember our trick is to try and draw them as evenly in the shift to shift them both as evenly as possible. And you know, you did that when you get a nice uh square shape in the middle. So I'm gonna try and do that here. There we go. That was a really good one. You can see that this square came out really good in this one, and this is kind of what you're aiming for when you do this, is to get this square to come out as even as possible because it's gonna be really clear what is the ambiguous variable. So let's go ahead and mark our original equilibrium as the intersection of the blue lines are new equilibrium is the intersection of the red lines and let's go ahead and see which variable is ambiguous. So at our original price and you can kind of already see which one's gonna be ambiguous here. It seems that our price here is gonna be along the same line and let's look at our quantities, so quantity looks like it has clearly decreased where quantity one was their quantity too, was there. And price kind of stayed on top of each other. So that ends up being the ambiguous variable. So in here I'm gonna write p question mark, Q down right quantity clearly decreased in this situation, but the price, it was ambiguous as to what happened. So let's go ahead and do the same thing here on the right supply, shifting to the right and demand shifting to the right. So same thing, we're gonna draw the curves as evenly as we can in the shifts to try and get that square shape. So there's my new supply curve, you draw my new demand curve. Alright. We did a pretty good one here too. You can see we got a good square. So let's go ahead and analyze our original equilibrium and our new equilibrium. So start with price. It looks like the price again for both of them are along just about the same line. So we're gonna know that that's gonna be our ambiguous variable because they kind of stayed in the same place and we can expect the other variable to have changed our quantity variable. And it looks like it has our Q. One was here. Q. Two is here, quantity has clearly increased. So in this situation we have price being um ambiguous again and quantity has definitely increased. Cool. Alright let's go on to the bottom half of the page and I think I can fit in here for the first graph. I get lonely when I'm not on the screen. So you know, let's go ahead and do this next one. So now we have a situation where supply is shifting to the left and demand is shifting to the right. So let's start with supply to the left, demand to the right and again. We've got a pretty good square going here. So let's go ahead and mark our original equilibrium, our new equilibrium. And let's compare. So let's start with price again. Now we've got an original price here. P. One and a new price here, P. Two. So it looks like prices clearly increased, right? They're not landing on top of each other. Let's see what happens with quantity. We should expect something ambiguous with quantity, which it does look like. That's what we're getting right. It looks like they're right on top of each other at this quantity that's gonna end up being ambiguous. So we have a clear increase in our price but uh an ambiguous what's gonna happen with our quantity. We're not sure whether the quantity will go up or down. So let's go ahead and do this last one. Now supply is shifting to the right and demand is shifting to the left. So supply shifting to the right, demand shifting to the left. Pretty good. That's okay. But we did get that square shape. Um And let's go ahead and mark our points. So there is our original equilibrium and our new equilibrium. So at our original equilibrium we had this price right here, P. One. And what quantity, what price did we have here at our new equilibrium, P. Two. So it looks pretty clear that price has decreased. So quantity should be are ambiguous variable, which it looks like it is right there, right on top of each other, quantity is going to be ambiguous. So we have price decreasing for sure and quantity is ambiguous. Alright, so notice what we've got in all these situations up here when both moved the same way supply shifted to the left, demand shifted to the left. We've got ambiguous price. And since they both shifted to the left it was a bad thing, quantity decrease. And the other situation, they both shift to the right. Price being ambiguous, but now quantity increased with right word shifts and down here when they're doing opposite shifts. That's when we get an ambiguous quantity and then the price will either shift up or down. So we kind of have that going for us. But it is always going to be easier to just put it on the graph and analyze it for every problem. Alright, There's no way you get it wrong when you put it on the graph and you do the analysis. Cool. Alright, let's go ahead and do some double shifting practice problems.
13
Problem
Problem
What happens in the market for cream cheese if (1) the price of butter, a substitute for cream cheese, falls and (2) the cost of milk, an input in cream cheese production, rises?
If the wages of bus drivers increases at the same time that the income of consumers decrease, what happens in the market for bus rides (assuming that bus rides are an inferior good)?
If producers of garden hoses have discovered new technology to improve production, while the number of gardeners increases, what happens in the market for garden hoses?
What happens in the market for tennis balls if (1) the price of tennis rackets, a complement for tennis balls, increases and (2) the price of baseballs, a substitute in production, decreases?
Equilibrium price falls, equilibrium quantity ambiguous
17
Problem
Problem
What happens in the market for wheat if (1) the cost of fertilizer, an input in production, increases and (2) tornadoes ravages the Midwest, where wheat is grown?
What happens in the market for online tutoring services if (1) the government decides to provide funding for online tutors and (2) the price of private tutoring, a substitute for online tutoring services, increases?
