When price is $7, quantity supplied is seven and quantity demanded is three.
Four is the excess supply.
Individual consumers can get what they want, but most suppliers can't sell everything they want, and they'll be stuck with movies that they want to rent.
Suppliers will tend to offer their goods at a lower price and demanders will try to get an even lower price.
Let's start from the other side.
The price is $3.
The situation is different now.
The quantity is three and the demand is seven.
Four is excess demand.
Suppliers are in a strong bargaining position while consumers can't get what they want.
The price is at its equilibrium at $5.
Consumers want to buy five and suppliers want to sell five.
The equilibrium price is where the supply and demand curves intersect.
There are two points about equilibrium.
Equilibrium isn't a state of the world.
It is the state of the world.
You use the framework to look at a characteristic of the model.
Let's see the force of the invisible hand.
There is upward pressure on price when there is excess demand.
There is downward pressure on price when there is excess supply.
Understanding these pressures is a must if you want to apply economics to reality.
A disequilibrium in another is caused by the quantity of movies supplied and demanded.
Say you're talking about a car that's going 100 miles an hour.
The car is moving relative to the ground.
It could be described as being in disequilibrium.
The cars could be modeled as being in equilibrium because their positions relative to each other aren't changing.
It isn't inherently good or bad to have equilibrium.
It's a state that's either good or bad.
A market in equilibrium is one in which people can buy the goods they want at the best price.
Other equilibria are not good.
Two countries are engaged in a nuclear war and both sides are destroyed.
There is nothing good about an equilibrium.
Understanding that equilibrium is a characteristic of the model, not the real world, is important in applying economic models to reality.
In the pre ceding description, I said equilibrium occurs when quantity supplied equals quantity demanded.
It's true in a model where economic forces are the only ones operating.
Political and social forces are operating in the real world.
The supply/demand equilibrium will likely be pushed away by these.
equilibrium is likely to exist where quantity supplied isn't equal to quantity demanded.
Farmers use political pressure to get higher prices for their crops.
Unemployment can be prevented from being accepted for work at lower wages because of social pressures.
Prices tend to rise when there is excess demand.
The price goes up when there is excess demand.
Existing firms try to limit new competition by lobbying Congress to pass restrictive regulations and by creating pricing strategies to scare off new entrants.
Renters organize to get the local government to set caps on rental prices.
If social and political forces were included in the analysis, they would put pressure on the dynamic forces of supply and demand.
If the market were only considered in reference to economic forces, the result would be an equilib rium with continual excess supply or excess demand.
Economic forces pushing toward a supply/ demand equilibrium would be stopped by social and political forces.
When trying to figure out what will happen to equilibrium price and quantity if either supply or demand shifts, supply and demand are most useful.
The supply and demand for movie rentals need to be considered again.
The quantity of movie rentals supplied will be 8 and the quantity demanded will be 10; excess demand of 2 exists.
I distinguished between an economic force and the supply and demand for children.
Children can be productive in farming communities.
They can work on a farm when they are six or seven years old.
Gary Becker of the University of Chicago was an economist who was good at this.
Farming societies will have more children per family.
The demand and supply of children are the same.
Developing countries that rely on Becker didn't argue that children should be bought, they just argued that farming often has three, four, or more children per fam sold.
He argued that economic considerations play a role.
Industrial societies tend to have fewer than two children involved in family decisions.
Along the supply curve and the demand curve, movement takes place.
The upward push on price decreases the gap between the quantity supplied and the quantity demanded.
The market is in equilibrium.
Increasing the quantity supplied from 8 to 9 and decreasing the quantity demanded from 10 to 9 bring about equilibrium.
Let's assume that some suppliers will no longer supply movies because they change what they do.
The quantity demanded is greater than the quantity supplied at the initial equilibrium price.
Two more movies are needed.
The upward pressure on price is caused by excess demand.
The price is pushed by an increase in the price of the small arrows.
The equilibrium quantity and price of hybrid cars are affected by the upward pressure on price.
The quantity demanded is equal to the quantity supplied.
The demand curve and the new supply curve have been adjusted.
You can try this exercise.
Even as demand increased, the price of com puters could have fallen dramatically.
When used correctly, supply and demand help us enormously.
I will introduce you to the limitations of the tools throughout the book, but I will also discuss an important one here.
Other things are assumed to be constant in supply/demand analysis.
One cannot directly apply supply/demand analysis if other things change.
It's impossible to hold other things constant when supply and demand are interdependent.
Let's use an example.
When determining the effect of ployment, we are considering the effect of a fall in the wage rate.
In supply/demand analysis, you would look at the effect that fall would have on price and quantity, in on workers' decisions to supply labor, and on business's decision to hire workers.
If you assume that other things will also have effects, which of the following markets would you choose?
There may be a reduction in demand for goods.
These ripple effects are important enough to make a difference.
There is no one answer to the question of which ripples should be included.
There is a lot of debate among economists about which effects to include.
When the goods are a small percentage of the entire economy, supply/demand analysis is appropriate.
The other-things-constant assumption will most likely hold that time.
The other-things-constant assump tion is likely not to hold true as soon as one starts analyzing goods that are a large percentage of the economy.
Consider a supplier who lowers his or her price.
The quantity of good demanded will increase if people sub stitute that good for other goods.
The substitution story is not allowed in the aggregate.
There are many examples.
An understanding of the fallacy of composition is relevant to Q10 Why is the fallacy of economics.
Whenever firms produce, they composition relevant for create income.
We have a separate macroeconomics because of this interdependence.
In macroeconomics, the other-things-constant assump tion central to micro economic supply/demand analysis often does not hold.
We separate macro analysis from It is to account for interdependency micro analysis.
There is an active debate about how complex structural models can be in modern eco- and aggregate demand decisions, because the supply and demand curves we use in micro are more complex than the curves we use in macro.
The fact that supply and demand may be interdependent does not mean that you can't use supply/demand analysis; it simply means that you must modify its results with the interdependency that you have kept.
Supply and demand analysis is a step in a good economic analysis, but you must remember that it is only a step.
I will be presenting examples of supply and demand throughout the book.
The intended purposes of this chapter have been served.
I gave you enough economic terminology and 96 introduction # Thinking Like an Economist to allow you to proceed to my more complicated examples.
I want to put the events around you into a supply/demand framework.
New insights into the events that shape our lives will be given by doing that.
You will have made an important step towards understanding the economic way of thinking if you incorporate the supply/demand framework into your way of looking at the world.
When quantity supplied equals quantity demanded, demanded rises as price falls, other things prices have no tendency to change.
When quantity demanded is greater than quantity as price rises, other things are constant.
Shift factors are factors that affect supply and demand other than quantity demanded.
The quantity rises (falls) are shift factors of supply.
In the real world, you must add political and social demand to the supply curve.
The laws of supply and demand hold true because demanded equals quantity supplied.
To ignore them is to fall into the curves.
Determine the market demand.
Draw the market supply and demand curves.
The equilibrium price and quantity will be labeled.
The shift factor of demand can affect your health.
The demon demand curve is the effect of a change in price on the equilibrium price demand curve.