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Market equilibrium | Supply, demand, and market equilibrium | Microeconomics | Khan Academy

So, let's say we are in the apple market.

What I want to do in this video is think about

both demand and supply for the apples at

different prices.

Let's draw ourselves a little graph here.

We already know this right over here,

the vertical axis is the price axis, and

this we're going to say is price per pound.

The horizontal axis this is the quantity.

The quantity of apples.

Let's put some tick marks here.

Let's say that's $1 a pound, $2 a pound,

$3 a pound, $4 a pound, and $5, and

let's say this is thousands of pounds produce

and we have to set a period.

Let's say this is for the next week, and so this is

1000 pounds, 2000, 3000, 4000, and 5000.

Now, let's think about both the supply and the

demand curves for this market, or potential

supply and demand curves.

First I will do the demand. If the price of apples were

really high, and I encourage you to always

think about this when you are about to draw

your demand and supply curves. If the price

of apples were really high, what would happen

to consumers? Well, they wouldn't demand much.

The quantity demanded would be low.

If the price were high, maybe the quantity

demanded is like 500 apples.

And once again I am being very careful to say

the quantity demanded is 500 apples.

I'm not saying the demand is 500 apples.

The demand is the entire relationship.

The actual specific quantity, we call that

the quantity demanded.

The price of $5 of quantity demanded would

be about 500. Maybe at a price of $1, the quantity

demanded would be maybe 4000 pounds.

Our demand curve might look something like this.

Might look something like that.

Let me draw it a little bit less bumpy.

So, our demand curve might look something like that.

I can label it. That is our demand curve.

I'll think about our supply curve.

Well, there some price below which we aren't

even willing to produce apples.

Let's say that's like 50 cents.

So at 50 cents that's where were even just willing

to start producing apples.

Let's say if apples ... if the price of apple got

to a dollar where the quantity we've be willing

to supply is about a 1000 pounds, and

it just keeps increasing as the price increases.

So this is the supply curve, and

when I talk about we, I'm talking about

all the suppliers in this market.

We could be doing this for a specific supplier.

We could be doing this for a specific market.

We could be doing for the global apple market.

However, you want to view it, but for the

sake of this video let's just assume its like

our little town that is fairly isolated and all of that.

Let's think about what happens in different scenarios.

What happens if the suppliers of the apples

going into that week for their own planning purposes ...

They just think for whatever reason, that their only going

to be able to sell the apples at $1 per pound.

Given the supply curve, they only supply 1000 pounds.

This is what the suppliers plan for,

and this is where they set the price point at $1.

One dollar per pound. Now, what's going to

happen in that scenario? Well in that scenario

they supplied 1000. The quantity supplied is 1000 pounds.

Let me write this down. So, I'll do it in pink

for this scenario. So, this scenario the quantity

supplied is 1000 pounds.

What is the quantity demanded? Quantity demanded.

This is all the scenario where the price ... the price or the

initial price that the growers or producers set

was $1 per pound. One dollar per pound.

Well the quantity demanded at $1 per pound is

4000 pounds of apples. 4000 pound of apples.

What do we have here?

Well, here we have a shortage.

We have a shortage of 3000 apples at that price point.

At a dollar, a lot more people are going to want to buy apples,

and the producers just didn't ... I guess

they didn't figure that out right.

They didn't produce enough apples.

Now what will naturally start happening?

If you have the shortage ... you have all these

people who want to buy apples, and you

only have so many apples there,

what might happen in the next period in the next week?

Well, first of all, those apples that are out

there they might get bid up, so, the prices start going

to start going up. The prices are going to start

going up. People are going to start bidding up

the apples. They want them so badly.

Their going to start bidding them up,

and as they start getting bid up, the producers

are going to say, "Wow! There's so many people

are running out of apples. We also need to increase

the quantity produce."

The quantity will also go up. The price will go up.

If you look at from the suppliers point of view.

The price will go up, and the quantity will go up.

They will move along this line there.

So maybe in the next period there's less of a shortage,

or they move away from that shortage situation.

If the price and quantity increase a little bit,

so maybe the price goes to $2, and the quantity

goes to ... I don't know, this looks like about

1900 ... 1900 pounds, now all of a sudden you

have less of a shortage. I think you see that I'm getting

to an interesting point over here.

I won't go there just yet. I won't go there

just yet. Let's think about another situation.

Let's think about after this happens.

Price and quantity increases so much that essentially

overshoots this interesting point right over here.

So in the next week the suppliers they'll say,

"Wow! People want our apples so badly, let's set

the price really high at $3, and at $3 we're really

excited about producing apples."

So, we the suppliers are going to produce ...

let me do this in a color I haven't used yet.

We the suppliers are going to produce at $3 a pound.

We are hoping to sell 3000 pounds of apples.

This is where, maybe, they adjust to the next week.

What's going to happen there at a price of $3.

That's the scenario right over here. The price of $3.

So, the price is now $3 per pound.

Well, now the quantity supplied is going to be 3000 pounds.

I could write 3000 pounds.

What is the quantity demanded?

The quantity demanded is now much lower.

The price is high now, because the consumers

might want to go buy other things, or they

can't afford an apple, or whatever it might be.

Now the quantity demanded, now that's looks

like about 1300. 1300 pounds.

What situation do we have now?

Well, now we have a much bigger supply then ... or

the quantity supply is much bigger than the

quantity demanded. Now we face a surplus.

So, now we have a surplus.

Let me draw that line there. I want to make it

clear this is all the same scenario.

We now have a surplus of ... what is this?

700 will get us to 2000. We have a surplus of 1700

pounds of apples. Now what happens in a

surplus situation? Well, apples won't stay good

forever, so maybe the producers get a little

desperate. They start selling.

They start reducing the price, maybe to start attracting

some consumers. They start reducing the price.

When they start seeing that the prices are going down,

and you have this glut of apples, there're all going bad

and not getting sold, the quantity is also going to

start going down. They'll produce fewer and

fewer apples, so we'll move here along the supply curve.

As you decrease the price, what's going to

happen to the demand curve?

Well the demand is going to go up.

Over here the prices was too high, so it's

natural for the sellers to lower the price.

When you lower the price it also reduces the quantity.

We go this way.

When you lower the price it increases demand.

You go that way.

If the price from the get-go were too low,

then you have this huge shortage, things get

bid up. The prices go up. As the price goes

up, the suppliers want to produce more.

They move up the curve. As the price goes up

then the people will demand less.

You see that's it's all converging on a point

right over here where the two lines intersect.

Let me do that in a ... its all converging right over there.

That's the price at which the quantity supplied will equal

the quantity demanded. We call this, which looks like

for this scenario, maybe about $2.15.

Let me just write it there $2.15.

We call that the equilibrium price.

Equilibrium price is $2.15 a pound.

It's the price at which the quantity supplied

is equal to the quantity demanded.

This quantity supplied is equal to the quantity

demanded. That's the equilibrium quantity.

That right over here looks like it's right

about ... I don't know ... 2200 pounds.

2200 pounds.

Assuming that nothing else changes, this is a

good scenario for both the consumers and the

producers. They keep producing 2200.

They charge this price, and everything's happy.

All the apples get sold and none of them go bad.