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Good to see you again today...
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If anyone needs a copy of the syllabus
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or class intrigue code application there's some up here you can pick up after class
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today okay today we're going to talk about demand-and-supply the first lecture on demand and
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supply demand-and-supply is a concept that is pervasive withour psyche
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everyone in our society has a concept of demand-and-supply and,
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this is actually one of the most important things that economics
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is a profession has contributed to the world
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...astonishing theory of how prices and output levels are determined
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within free markets in fact it's so pervasive in our psyche people say all the time
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just a matter of supply and demand we forget that actually somebody had come up with this
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at one point and think of things in this particular way
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it's a great example of how theory
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that is stripping away things that are relevant focusing on things that are the forces that were
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interested in can truly affect and influence the way you think about stuff.
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it is pervasive in our society this concept and yet it is exceedingly
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poorly understood this theory is much more subtle and
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much more powerful than anyone normally gives...credit for
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it's just amazing the kinds of things that you can do with just concepts of...
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applications that they have that you wouldn't be able to work out without these
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concepts so what I want to do today is give you an example of that start from the beginning what is demand
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what is supply how they work together and then an example of how you can get some
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applications that you might not have thought were something that could come from such as simple theory.
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And, today we're going to user continuing example of salmon.
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That's a little fish-eye...drew up here.
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You might think it's a silly example but is not.
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...a huge industry especially in the west coast.
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...there's a lot of money associated with it also it's a
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very big issue for environmental issues I think this last year.
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Two thousand eleven was the first-year
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in about eight in which we've had actual free
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market free fisheries for salmon of the california coast prior to that
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various reasons parts of the fisheries have been closed off for part of the season
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or all of the season because of reduced salmon populations and,
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every year we have to go through this thing of examining whether we can continue
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fishing for salmon also I don't know-how many of you know about the
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colombia snake river has all these dams and they actually have built
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a little ladders for the salmon to go up to past the dams I
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mean this is a tremendous amount of money we're spending just to make sure salmon can continue
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to be alive and, those dams actually don't work as well as a
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free flowing river so there's constantly.
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Proposals being put forth by the government and local
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people to remove some of the dams along the columbia snake it might actually happen okay,
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so, that, you know, shows that this is an important topic.
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But, we're going to start from the beginning demand-and-supply
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essentially creates two groups of people that you the more you can think of them
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is being separate the better your thought process going
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to be there's the people who by goods and there's the people who create in-cell the goods
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thing obviously you can be both but it's
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easier to think about it separately so let's look at demand first then...and put them together.
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Okay, so, the I do with demand is it's a hypothetical
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construct.
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This...to recognize this is the theory.
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And, it explains things in by asking
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hypothetical questions getting answers to them and describing what the implications of that
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...the first thing you ask for the demand is if the price were
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certain level it's not necessarily at that level but if price were to certain level what is the
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quantity that people consumers would buy of the good
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will be willing and able to buy of the good and,
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virginal pointer.
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There.
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So, what I've done here is
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asked hypothetical question for three different prices if prices eight dollars we don't know what the
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prices yet these theories can explain what the price will end up being but if the price
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were eight thousand eight dollars per pound
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then twelve thousand pounds would be purchased by people at that price?
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If the price were six ...you'd so more because it's cheaper now people would
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buy more salmon and less other fish...might switch over instead of buying chicken
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...salmon for dinner so there's going to be an increase in the amount
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that people are willing to buy the price of...price of for...buy even more.
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So, what we can do is just graph those points and,
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...in a particular way will find later in the class
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this is actually the opposite way of what would make sense mathematically but it makes
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since intuitively so we're going to do it this way put price on
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Vertical axis and price per pound.
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You put quantity on the horizontal axis...is the quantity and then you
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say asher question at any given price what is the quantity that's going
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to be purchased at that price that people would be willing and able to purchase of that
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...the price so the first point we saw was a at a
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price of eight dollars...is twelve and these quantity is
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measured in thousands so we don't have to put all the trailing...as one point next point
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is at six dollars you would have eighteen and four dollars for
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twenty four we could have asked this question and the theory
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behind this is that we essentially would implicitly ask this question for every
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single possible price so we would get these three points but all the points in between them.
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Let's...that connects all those points.
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And, that now includes all the points including
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these three but everything in between them and extending beyond them so it just tells you
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at every given price what is the quantity that would be purchased at that
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price this is called the demand curve I've drawn it is...just because it's easier to
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...is align generally you wouldn't think that a
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demand curve is a straight line it could curve that's why it's called
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a demand curve...to talk later in this class about why it would be curved
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and what the implications of that are...but it's easier to just draw it
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...as...a straight it gives the quantity
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...consumers buy at each price so you start on the left-hand side
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...price read over to the quantity it gives you the quantity that people would buy at that price?
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Now as I've drawn it it's
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downward-sloping if you look at it and you try to draw pro-ball appear
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...roll right down going that's what's meant by downward
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sloping the other way to think about it that is more important or more fundamental
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is that if you change the price of the good the quantity
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that is demanded would go in the opposite direction so if you lower the price
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...what happens to quantity is that
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the quantity actually increases the quantity that people are willing to buy increases this is what you'd
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expect that you would expect that as the good gets cheaper more people are willing to buy
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...otherwise.
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Okay.
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It also works in the reverse this is why I think
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this downward sloping demand name is a
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little bit problematic when you're going this direction it looks like you're going down but the
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same thing occurs when you going in the other direction if you raise the price from a particular
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level and said what would happen if we raise the price to a higher price
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the quantity demanded decreases and now it looks like we're going up the hill.
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So, what does...mean downward sloping...actually means a...
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thequantity changes in the opposite direction of the price?
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Now we define this as a law of downward sloping demand.
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What that means is that in nearly all instances
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you expect demands for goods to be downward sloping in
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rare exceedingly rare instances it's possible that a...
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as aincrease in the price of the good could actually increase the demand for it but
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it's exceedingly rare usually that's not the case?
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Of notice that this is the demand for a given good that
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means holding all characteristics of the good constant
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so usually if you think the demand curve is upward sloping
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is because you're actually not holding all the characteristics of the good constant other than just
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price.
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So, let's think of some things what
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are some ideas of where can you think of any cases in which
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and increase in the price of the good actually causes more people...want to buy it.
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Yes, and, in fact what you said okay I'll repeat
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because you can't hear everything the example was universities if you increase the
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price...increases the prestige of the university and more people want to go
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That is true that issue increase the price the demand will
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rise or perhaps true but notice what the reason was is because
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...characteristic of the university has now changed
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is now more prestigious.
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So, nearly always when you think that the demand curve
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is upward sloping in this particular fashion is because implicit in the explanation
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is something else is changing about the good in this case the good is not the same
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...more prestigious so, that's one example what's another one a very popular one, yeah.
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Right so, there are a car that's more prestigious.
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If you raise the price of it becomes even more prestigious and the
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demand could increase that's true for some cars I don't know who would buy a bentley for three
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hundred-thousand-dollars it work for the self-image that comes from it but
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again what's happening there is as you raise the price it becomes more
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percentages if a bentley cost twenty five thousand-dollars no
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...by it because it's like...huge to park.
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It's raising the price giving it their prestige what's happening there again
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if you're changing the quality of the good you're changing the good this
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...important one other example that's really popular, yeah.
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It is quite often the case the price of stocks go up this is
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what created a huge boom up tilled twenty-eight the
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stacked price of stocks go up everyone thinks that means they're going to continue
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going up so they want to buy even more stocks everyone gets on...the bandwagon but again what
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has happened there is are concept of where the stock prices
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going to be in the future has changed the price going up now makes...think it's going to go up
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in the future if it didn't go up now we wouldn't think is going up
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the future so again that's a characteristic of the good our
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perception of its future value that is changing.
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If you take away all those instances there are practically
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You will learn in a hundred a when you take
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the class of one particular kind of good for which there's actually
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...demand curve but it's
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...rare and it's important to think through these things I like these examples because it
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helps you understand what exactly we're talking about with demand really need to think
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through these examples so I'm glad for all these suggestions...
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Okay, now what
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I talked about so far is the demand curve
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given for one particular good with characteristics of that good and just changing
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the price of the good so that's the only thing that's changing what if something else
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in the economy changes other than the price there's all kinds of things that affect what people
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buy there's all kinds of things that
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this affect why we choose one good over another good if any of those things
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change...that's going to affect the demand curve, for example.
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If we all have higher-income somehow we
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get more income then the demand for salmon which is more expensive to eat
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the most foods probably rises.
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What that would mean is at any given price?
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What used to be the quantity demanded is now going to be higher because more people are going to be
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buying it at that price so a change in the price of the good?
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Is represented as I've described by the demand curve itself
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okay but a change in anything else in the economy that affects
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how people decide what to buy is represented by a shift of
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the entire curve game so here's an example of where it shift
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out anything that effects what people choose to buy is going to affect the demand curve to the
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demand curve is best thought of as the
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existing at a point in time and then can be changing over time?
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If and report comes out showing that salmon
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has higher levels of mercury than we had previously thought.
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Then people quit buying it so much
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the demand curve will shift in what's another example
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of something that would cause the demand curve to shift.
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One where the...
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Yes, if the price of say maybe that's yes here if the
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price of halibut goes down.
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...might buy halibut the
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...of salmon so the demand for salmon comes in so it's mainly.
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Income.
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Prices of alternative goods that we shown here and
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...since of the quality of the good itself which in this case the example I was
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giving was our since of the health
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benefits from it so any of those things changing can change the demand curve.
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Okay, so, just to be very clear we use
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prep there's a crucial difference in the use of a
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preposition when we talk about movements of demand
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changes of demand when we talk about the change in the quantity demanded.
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From suppose we
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start at a price of six dollars and there's eighteen thousand pounds that are being demanded.
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If we're talking about a change in the quantity demanded as a result of
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the price changing that's movement along the demand curve
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...preposition there is along the demand curve if you're talking about
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a change due to something else other than the price.
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Is achange a movement of the demand curve so you have
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to types of movements movement along the demand curve
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...movement of the demand curve and its even though it's just a preposition it
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sounds very small difference it's a crucial difference in how the analysis
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will play out and whether you'll get insightful results or nonsense from
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the from your analysis using demand and supply curves so keep those changes in mind?
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Ok, so, that's the demand side.
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Then we have the people who are supplying salmon while salmon these are people
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to go out on boats and usually trolling boats in harvest the salmon from the
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...and, they decide.
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Whether to go out whether it's worthwhile and
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their decisions based on what they think they're going to be able to sell the product for so if the price
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is relatively high at eight dollars a pound then you'll get lots of people
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going out and deciding to spin the time necessarily catch them and bring it into
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port and sell it if the price dropped to six dollars
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...those people would be less willing some of them would decide well it's better to do something else
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with my time fish for some other fish or not go out
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at all and I work at some other job and the result would be
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that there's fewer amount of this salmon provided by the people
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...supplying it and similarly reform.
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So, you do the same thing here...them
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price on the vertical axis and quantity on the horizontal axis.
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When the price is four dollars you get that eight
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...all three just like on the demand side is just a flip of the whole thing?
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And, the curve that connects all those is called the
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supply curve it's the gives the quantity that firms provide at each
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price.
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Now we do not have
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anything equivalent to the law of downward sloping demand.
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That applies to the supply curve.
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Is quite possible the supply curve is flat?
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And, in fact as we will see later in
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this course the crucial benefits of competition.
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Come from the fact that in a competitive market the market supply curve ends up being
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It has no upward slope.
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So, here we don't have that ...that the same type of
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...analysis essentially what's happening there with a flat supply curve is
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if the price is below some point nobody will supply it because it's
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you can't make money at it and if prices above that amount.
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Everyone in the world want to supply it because everyone can make a...
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you get an all-or-nothing kind of scenario and the flatliners just,
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you know, what connects those to...and very large number that's quite possible?
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Okay,
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so, we also though have to think about why the supply curve changes first of all
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...movement along the supply curve as the price changes the quantity
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supplied would change but there's also shifts in the supply curve itself
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due to anything that would affect the people are providing this yep.
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Samoa.
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If the price dropped.
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Perfect that
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which you're bringing in now is the interaction of demand and supply.
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If the supply if people if suppliers don't provide enough of the salmon for what people want the
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price is going to be driven up.
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But, what your implicitly doing in your statement is saying
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this the amount that ends up being supplied is going to depend not just on suppliers decisions
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but on the interaction of that with demand and that's very important we're going to...that after this we're going
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to put supply and demand together that's the key element what you're talking about but
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before you get to that it's very important to talk about suppliers and demanders and
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get that your head separately the suppliers in this case?
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...hypothetical question was if the price is eight dollars
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how much would suppliers be willing to supply.
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They can't do anything about the price were not saying well if they could negotiate the price of a new the
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price is going to change...if it's eight dollars what would they do if we're six dollars what
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would they do and they were guaranteed that price they were going to find
00:22:02.180
out later that hypothetical does that actually current the world.
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But, are thinking in terms of the hypothetical helps us to understand what goes on the...
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Let me get into the demand is supply interaction and
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then show how that's probably we actually have next lecture we're going to
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have a whole thing on oil prices so let's...that...
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But, what this these are pointed out is that the demand curve and the supply curve
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or asking hypotheticals that need not indep
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activated in the economy is saying if the price is eight dollars what would consumers
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by if the price for eight dollars what would suppliers supply and yet the
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price not might not end up being eight dollars thing but we still as
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...hypothetical define these terms?
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This is how this is much more subtle than people think, you know,
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it's not you it's a strange thing where...a hypothetical that
00:23:14.580
is the demonstrative...faults.
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To show how the market works.
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But, it actually helps you do that.
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Ok, so, now the shifts in the supply curve what-you want-to do here is the same thing is on the demand
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curve but think about what affects suppliers decisions things that
00:23:38.710
affect their decisions on how to produce this good or how much to produce is what's going to shift the
00:23:42.790
supply curve so again you want switch you're thinking to the supply-side and
00:23:47.230
what affects them all suppliers the main thing that affects them is the cost of going
00:23:52.210
out and doing their business and if they can't get a higher price to cover their costs are going to
00:23:57.480
not do it so, for example, if the cost of motor fuel to
00:24:02.420
our these boats goes down is going to be more people willing to go out because they're going
00:24:06.590
to make more profit at any given price so at any given price whatever
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profits per people were making before now what are lower price of oil they're
00:24:16.100
going to make more profits and more people are going to be wanting to go out and getting those profits so
00:24:22.430
they're going to be an increase in the supply of the salmon when
00:24:28.690
the cost of producing...of supplying in this case goes down and
00:24:34.130
of bad weather occurs something that it's not you know,
00:24:37.290
technological or economically related but,
00:24:41.900
just does affect people's decisions that would cause an in would shift people don't want to go out
00:24:48.580
when it's dangerous to be out on the...so there's going to be...would shift the supply curve?
00:24:54.440
Ok, so, now we interact the...you could probably gas.
00:24:58.320
The point of demand and supply is to figure out what
00:25:03.050
the price is going-to be in the market not all these hypotheticals of if price
00:25:07.380
...this but what is price going to be so we have a
00:25:12.240
downward sloping demand curve supply curve that is often upward-sloping it can be
00:25:17.210
...to reasons we'll see later in this class but.
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You put those together it doesn't take a genius to think
00:25:24.480
about well all there's gotta be something happening there
00:25:28.510
ok but before you get to that intersection I
00:25:34.790
think it's important to look at the process that occurs.
00:25:37.710
Moves price in particular directions and why that
00:25:40.670
intersections important so I want you all
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in this class when you see graph like this or anything there's an immediate tendency to go
00:25:50.290
to the solution and you can often visually see what the solution must be okay
00:25:53.920
but rather start somewhere else and see why it is how
00:25:57.490
you get there so that's what I want to do now?
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Suppose the price...four dollars and what's going to happen is we're going to
00:26:08.340
have eight thousand pounds of fish supplied by suppliers
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...how much they're willing to go out and caps these fish but we're going to
00:26:14.310
have twenty four thousand pounds of people want to buy.
00:26:19.330
So, what's going to happen here.
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The first thing that's going to happen is.
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This is going to be the quantity that's actually sold.
00:26:27.730
At that price.
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Why is that?
00:26:33.620
It takes two parties to make a
00:26:38.470
transaction you have to have a buyer and seller it takes two to tango.
00:26:42.020
So, what means is there's only this many suppliers?
00:26:47.270
Each of them will hook up with a buyer and make a transaction at that price.
00:26:52.380
And, all these remaining buyers will be left without having their
00:26:57.190
demand satisfied they want to buy at that price but they're not able to so
00:27:02.140
the quantity that's actually provided here is the lower of the to demand and
00:27:07.110
supply because it always takes both parties to agree to the transaction so this is the quantity that
00:27:12.360
will actually be transactors at that price and what will happen is there will be a
00:27:12.860
latent?
00:27:14.380
Demand.
00:27:20.110
Excess demand for the good at that price
00:27:23.670
they're going to be this amount of the good that could have been
00:27:28.030
sold that price of any wanted actually provided it but no one did
00:27:30.110
...suppliers didn't want to provide that much that it
00:27:34.780
...go out that longing go fishing so we have a shortage of the good people
00:27:43.300
want to buy the good more than are able to buy the good and what happens with a shortage?
00:27:46.750
every market that you can think of somehow.
00:27:50.900
A shortage translates into increased prices.
00:27:55.950
We can try the hardest way we can to avoid that.
00:28:01.130
There's price controls but inevitably it somehow happens you know,
00:28:05.750
there's price control on rent control in manhattan on apartments will what happens, you know,
00:28:08.900
you get these side deals between the manager and,
00:28:13.650
you know, there's some way in which happens what happens is when you can think about this kind
00:28:16.930
of weird process if the...come
00:28:20.340
...say fisherman's wharf and they...we got lots of people want to buy
00:28:24.800
are goods each person who's selling salmon could say well,
00:28:26.370
you know.
00:28:29.040
If you buy it for me for four fifty.
00:28:33.010
I'll sell it to you at least you'll get it rather than not having it
00:28:35.830
all day so they
00:28:39.250
...suppliers will raise their price knowing.
00:28:42.710
That they're still be able to sell at a higher price at four dollars so even though
00:28:47.710
the price now currently is four dollars there will be a tendency for suppliers to try to
00:28:52.580
raise their price and convince buyers divide from them rather than do without which define
00:28:57.010
some that do that or if you're out there fisherman's wharf and want to get
00:29:02.040
salmon because you're planning to have a dinner party that night and you want to be sure to get be one of the people
00:29:07.310
...the natural thing to do would be to walk up to a supplier and say
00:29:10.510
...pay you five dollars for it seller to means to that
00:29:13.090
person thank both sides
00:29:26.160
of the interaction would put pressure to have prices rise.
00:29:29.720
This doesn't shift the supply curve what's happened here is
00:29:34.150
at this price this is how much people who are selling salmon are willing to go out
00:29:38.330
...catch it bring it back in for this how much people want to buy.
00:29:41.550
And, what happens is?
00:29:44.170
We have more people want to buy than there are
00:29:49.000
being sold and at the existing price that means the price
00:29:53.650
will stay that way price will rise both parties will.
00:29:57.430
Place some kind of pressure on price to rise either suppliers
00:30:01.720
are say if you want to buy it you gotta pay for fifty...for me and
00:30:06.490
people buy from when that happens now what's getting at your question now
00:30:11.490
when that happens what's interesting is as the price rises now
00:30:17.350
the price is higher and more and more people are going to be willing to supply the good so that's how the
00:30:22.050
shortage goes away as the price starts out of four dollars and there's
00:30:27.000
pressure on price to rise as the price rises both parties building it up
00:30:31.890
...suppliers then start being willing to supply more of the good and the shortage
00:30:35.570
get smaller and what else happens when the price rises as the
00:30:40.080
price rises fewer people want to buy it they might be willing to buy that much of four dollars
00:30:45.530
but for fifty some of them just don't want to buy anymore so both?
00:30:47.540
Sides of this.
00:30:48.730
Change.
00:30:53.640
Over time to reduce the shortage until
00:30:58.450
eventually shortages gone so it's not a shift the demand curve or the supply curve the
00:31:00.180
causes this both of them
00:31:04.730
...the where they are and all this happening is now a
00:31:09.710
price that started out at a particular level because it...shortage
00:31:14.520
it cannot continue that way it won't continue that way and what we have is a change
00:31:19.160
in price which is a movement along the supply curve and a movement along
00:31:26.580
the demand curve both of which serve to reduce the shortage?
00:31:32.030
Dig so what happens is if you're ever in a situation of where there is more
00:31:35.880
demand-and-supply there's a tendency for prices to rise so
00:31:40.850
you can't stay there it won't just continue to be there suppose
00:31:46.080
...look at the other side you get the same story but just in reverse.
00:31:50.910
At a...of eight dollars suppliers now really liked that they're willing to go out and spend a
00:31:56.980
lot of time-out catching fish...back twenty eight thousand.
00:32:01.870
The buyers only want to belie twelve thousand of them and what we have is a surplus
00:32:08.260
...again what is the quantity it's actually going to be transactors at this price?
00:32:13.160
It's going to be the lower because it takes two to tango which is interesting what this tells
00:32:18.000
us is this curve is a answer to
00:32:22.550
set of hypothetical questions what if price...certain level this curve is
00:32:27.780
also a answeredhypothetical questions and the only parts that we
00:32:32.670
would ever potentially observe or actually the left-hand side
00:32:38.350
here this part not only is a hypothetical is never seen.
00:32:40.510
You don't transactors there.
00:32:45.510
That doesn't mean those parts of the curves are not important because they determine
00:32:50.420
what would happen if things changed...but it just points out again
00:32:55.650
that this is a theory that is a great example of
00:33:00.520
how thinking about things in a particular way can truly help you
00:33:03.910
analyze problems and all of this is
00:33:09.450
hypothetical and never...so it's not, you know,
00:33:20.820
the idea that the theory has to only be about facts is not true it's not true.
00:33:24.010
Never intersect yes in fact
00:33:26.680
you're sections going-to go over some.
00:33:32.650
And, you might want to think about some why that might happen...could not intersect.
00:33:39.240
And, those goods we just don't see in the market.
00:33:42.680
Okay, so, what happens when there is a surplus suppliers have all this fish
00:33:45.510
...into fisherman's wharf they can't sell it
00:33:48.440
...they do they start saying hey by for me I'll
00:33:52.390
...for seven dollars innovate dollars by for me I'll buy a sell two
00:33:56.230
four six dollars and the people who are going there see that there's all this
00:33:58.790
...piled up nobody buying it and say well, you know,
00:34:02.300
if you want me to buy this I'll up...six dollars for not
00:34:07.140
...there is going to be some mechanism somewhere in the system that causes the
00:34:12.400
price to drop and that's what's going to happen and in both of those on both
00:34:17.160
sides again as the price drops the quantity that people
00:34:21.710
buy is going to go up that reduces the surplus
00:34:25.940
and the quantity that people supply is going to go down that reduces
00:34:31.720
...surplus also and you move so if you're above that intersection the tendencies for
00:34:36.930
price to go down if you blow the intersection the tendencies for price to go up?
00:34:41.640
...at this intersection you have neither a surplus or a
00:34:44.700
shortage.
00:34:49.629
And, that's equilibrium at
00:34:57.010
six dollars the quantity supplied is exactly equal to the quantity demanded.
00:34:57.690
Ok, so, an
00:35:05.370
equilibrium the equilibrium price is where there's no shortage or surplus?
00:35:08.640
This however is a definition it's not a definition...
00:35:11.660
characteristic of equilibrium in this situation.
00:35:18.460
Of the definition of equilibrium we're going to use equilibrium throughout this whole
00:35:22.790
...central concept of economics is that there's no tendency for
00:35:25.040
change.
00:35:29.710
notice that it any other price that we were at there was some force operating
00:35:34.090
to not allow us to stay there if we're at a lower price such that there was
00:35:39.020
a shortage of the good there's going to be tendency for prices to rise and we won't stay there
00:35:43.770
for get a higher price there's a tendency for price drop only at this price is
00:35:47.220
there no tendency for to change so we would stay there once
00:35:51.350
where there that's what equilibrium is described dot defined as
00:35:55.920
...no tendency for change it's kind of like what is the buddhist concepts
00:36:01.920
...balance you have nice balance that's which this?
00:36:02.630
...demand
00:36:07.620
and supply situations we've described this means that there's no shortage or surplus the demand is
00:36:12.300
equal to supply however you probably already know just from your
00:36:16.450
...concepts of economics if you took this...high school.
00:36:21.380
There can be equilibrium in some types of situations that have shortages a
00:36:27.120
surpluses...of an example of an equilibrium where you have.
00:36:29.070
No, tendency for change.
00:36:31.610
And, yet there's.
00:36:48.650
A surplus.
00:36:53.840
I guess so.
00:36:59.550
Have a surplus?
00:37:03.720
That's hard thing to think about I don't a rational supplier wouldn't have a surplus
00:37:07.150
that only produce exactly what they need to sell.
00:37:09.440
The capability of having a surplus.
00:37:23.030
Makes them able to make,... whatever has.
00:37:28.030
Externalities was the question was the answer maybe we're going to get into that let me just tell you what I was
00:37:30.280
thinking...
00:37:35.330
Remember keynesian economics you can
00:37:40.070
have an equilibrium in the economy with unemployment you've got
00:37:44.880
an excess of workers looking for jobs and not enough jobs for them all
00:37:49.490
and you can sit there forever that's an equilibrium
00:37:54.110
that's perhaps we're in right now with our nine-and-a-half nine-point one percent inflation
00:37:59.800
...that's an example and the whole genius of the keynesian
00:38:04.350
analysis of the macro economy was how you can have an equilibrium
00:38:06.180
no tendency for change.
00:38:08.110
With surplus...
00:38:12.480
And, that's the major topic we're going to get
00:38:17.430
to in macroeconomics the point here is simply you want to look at equilibrium as no
00:38:21.110
tendency for change that's the insightful way to look at it you work through the
00:38:26.430
system-c if there's no tendency for change then that's the equilibrium and then it might be
00:38:31.270
that means no shortages...surplus as we have here.
00:38:32.430
Okay,
00:38:38.410
so, what happens now to this equilibrium as the demand curve shift in one direction or another?
00:38:42.240
Is relatively straightforward suppose there's a something going on
00:38:45.350
the causes people want to buy more salmon what?
00:38:48.140
That means is say income rises or the price
00:38:53.010
of halibut increases so people want to buy salmon instead of halibut the all demand curve
00:38:57.940
and shifts outwards and what happens is there's an increase in the price an increase in
00:39:02.440
the quantity importantly an increase in demand raises the price of the good
00:39:06.860
...essentially happens is an increase in the demand a shift out the supply curve
00:39:11.610
immediately creates a shortage so...existing price the immediate effect is
00:39:17.510
a shortage more people want to buy them currently can activate their desires and that
00:39:22.460
causes upward pressure on prices as prices rise the quantity supplied increases
00:39:27.310
the quantity demanded decreases until you reach this new equilibrium at a higher price
00:39:32.270
so an increase in demand again going through that story is
00:39:36.700
important for understanding what's happening instead of just saying you go from here to here?
00:39:40.230
To understand what happens is immediate effect is
00:39:45.110
a shortage which causes pressure on prices to go up which causes quantity demanded
00:39:52.060
quantity supplied to converge towards each other is what's important.
00:39:56.780
An increase in the supply of the good if motor fuel gets less expensive
00:39:59.400
than that causes the price to decrease
00:40:03.500
ok so an increase in each of the curves has the opposite effect
00:40:07.930
on the price and again the impact here is.
00:40:10.480
The same if the immediate effect
00:40:16.060
is a surplus of the good and then that surplus causes downward pressure on
00:40:18.450
...prices drop
00:40:25.400
the quantity demanded goes up the quantity supplied goes down...you reach a new equilibrium.
00:40:26.660
Ok.
00:40:30.600
So, this is the concepts of demand and supply.
00:40:34.360
I now want to show you how you can uses in a way that
00:40:38.910
can profoundly affect public policy.
00:40:43.610
Our government is had a war on drugs since I was in high school.
00:40:46.580
It's continuing and I think more than half of
00:40:50.030
the people incarcerated in california are their own drug charges.
00:40:53.290
And, yet.
00:40:57.450
What I would hope to convince you or explain to you is that?
00:41:00.300
This war on drugs.
00:41:02.580
Could be...known to be doomed
00:41:08.300
to failure just using basic concepts of demand and supply demand-and-supply
00:41:13.080
concepts shows that it is necessarily going to fail?
00:41:17.190
Can't operate correctly or better yet the more effective the war on
00:41:21.490
drug is at incarcerating people and makingreducing the supply of
00:41:28.040
drugs the more it's going to exacerbate the problem of drugs in the economy?
00:41:31.620
This is something again.
00:41:36.620
Well, it's just using the concepts of supply and demand that provide this implication
00:41:41.480
without any empirical analysis actually except one little thing okay so let's draw the demand
00:41:44.320
...supply of drugs and see what the drug program is trying to do
00:41:49.700
...the drug demand for drugs of drawn it
00:41:53.600
here the one thing that is important to the analysis is that I've drawn
00:41:56.590
it steeply what that means is if you're at a particular price
00:42:01.310
for drugs and you raise the price paper going-to still pretty much continue buying
00:42:06.040
the drugs for addiction drugs like heroin cocaine math.
00:42:10.930
The price to go high and people still are going to buy it ok so there's going to be a relatively
00:42:15.610
small diminution in the number of people quantity demanded as the price rises so
00:42:20.930
the demand curve I think we can all agree is relatively...
00:42:30.170
steep there's been a lot of empirical work with this same is true for cigarettes so,
00:42:34.390
then let's drawing and the supply curve it really doesn't matter how we
00:42:39.200
draw and I'm just going to put in here the shape of it doesn't matter that much to the analysis
00:42:41.200
steepness of the demand curve does matter
00:42:46.100
ok so now what is are we end up with is.
00:42:51.740
In the absence of a war on drugs if we just let things be as they would
00:42:56.620
...naturally occurring market we have a demand curve and we got a supply curve
00:43:00.410
...people supplying the drugs these are people buying the drugs you get some equilibrium
00:43:06.070
price and you get price and quantity that at that equilibrium importantly
00:43:09.050
from the analysis I'm going to describe.
00:43:13.610
This box here the square this rectangle.
00:43:17.390
Is a graphical representation of the amount of money
00:43:20.100
that is transactors in the drug trade?
00:43:21.820
Is the price?
00:43:26.260
Times...quantity remember your basic geometry that the area
00:43:31.440
of a rectangle is the height terms of width...the height is price and the
00:43:34.130
...quantity so this right here
00:43:38.410
the area of that rectangle is the quantity of money
00:43:43.380
that's spent on drugs is the quantity of money that the drug sellers obtain
00:43:50.790
is revenue and the quantity of money that the seller buyers have to come up with
00:43:56.630
So, now what is effect on the were drugs the purpose of the war on drugs was to attempt drugs from
00:44:00.700
entering the country and to imprisoned drug dealers.
00:44:04.210
And, the point of this was to reduce the supply of drugs.
00:44:07.800
The point of reducing the supply was
00:44:12.360
two-fold there's always been to parts of this program one
00:44:17.180
we think that people should not be using drugs it's harmful to themselves there's that
00:44:22.560
aspect but actually the bigger aspect from a political perspective is that the tremendous amount of
00:44:27.720
violence and crime that's associated with the drug trade.
00:44:32.100
sellers have cartels and have enormous
00:44:36.830
bloody battles over who's going to control the drug trade?
00:44:39.460
And, the drug buyers often have to
00:44:45.060
engage in crime to be able to pay for the drugs that they're getting.
00:44:48.800
That's one reason the demand curve is relatively...steep the price
00:44:54.470
goes up people that are severely addicted will
00:44:57.320
you do what's needed to get the money to buy drugs
00:45:02.290
...so the point of the drug program was to reduce people's individual use of the drug
00:45:07.770
but also to produce reduce these problems associated with the drug trade.
00:45:10.700
What is that going to do?
00:45:14.380
We can then say suppose the drug program
00:45:20.080
is actually successful...a reduction supply that
00:45:25.060
actually incarcerated people prevents drugs from coming across the border and things like that
00:45:27.440
...that does is decrease the supply curve.
00:45:34.110
So, the supply curve drops from its original level...is a new level.
00:45:36.690
And, what is the impact of that?
00:45:47.070
The impact is moving from the old equilibrium to a new equilibrium.
00:45:51.910
The two things that we're wanting to accomplish our sorry this is the new amount of money that's being
00:46:00.950
spent on drugs after the war on drugs...occurred so what's happened is.
00:46:06.900
amount of drugs that are actually being sold drops exceedingly little.
00:46:12.660
So, we don't have much impact on the amount of people actually consuming drugs.
00:46:17.090
the amount of money is spent on drugs that is the source of the violence
00:46:18.170
...for people buying
00:46:21.850
...drugs and those who are selling the drugs has actually increased.
00:46:24.560
We now have.
00:46:28.860
More money in the drug trade and we had to start with
00:46:40.040
it's an inevitable outcome of this situation,...
00:46:42.330
Right this is because the demand
00:46:48.150
curve is exceedingly steep if the demand curve is steep the main impact
00:46:52.760
of reducing supply is going to be increase in the price.
00:46:54.660
You can think of it as the
00:46:59.630
original equilibrium is here and this amount of money spent on drugs what
00:47:04.190
happens is you incarcerated a lot of people stop the drug from coming into the country the
00:47:09.950
supply drops to here and there's a shortage what happens with a shortage the people who have
00:47:14.030
the drugs then can raise the price make a lot of more money the people who
00:47:19.030
want to buy the drugs are offering to buy at a seller to be lp more money that causes the
00:47:23.640
price to go up and notice what happens when the price goes up with the price goes up
00:47:29.450
the supply increases because now it becomes more profitable whatever people
00:47:33.980
are willing to incur as a risk of getting caught whatever profit was necessary for
00:47:38.050
their to incur the original risk now the risk is higher but if you
00:47:41.850
raise the profits the same tradeoff is being made?
00:47:46.200
They now become willing to incur more people are willing to incur the risk the
00:47:52.260
increase risked...to the supply the drugs eventually price
00:47:57.210
rises high enough to where the quantity provided is practically the same as
00:47:59.960
it was before just slightly lower what
00:48:04.490
has happened is the government has increased the cost of
00:48:08.540
supplying drugs such the prices head to rise.
00:48:11.970
Sufficiently to warrant people still supplying the same
00:48:16.250
quantities they had before so what's happened is we've just incurred a cost
00:48:20.900
on the supply side which is then borne by the people who by the drugs
00:48:23.920
...increase the total amount of money being spent
00:48:29.760
in the market so the amount of violence actually goes up.
00:48:33.220
Now the only way you could get out of this if you truly believe
00:48:39.440
in that war on drugs is to say that the demand curve is not steep.
00:48:43.160
But, I don't think there's anyone who believes the demand curve for drugs is not
00:48:48.880
steep that you raise the price people just quit doing it all...quit that's
00:48:53.750
...empirical research has shown that so...shows is, you know, we could have known this
00:48:58.460
before...people that our government...just take this class moi
00:49:03.690
...save all this money so what do you do instead if you have a
00:49:07.270
debatable supply system like this and, you know, the supply
00:49:09.670
...interactions the supply of
00:49:14.410
...is going-to be the wrong direction it's going to hurt things.
00:49:19.140
Your other option you've got to levers supply and demand.
00:49:23.750
Education and rehabilitation programs to reduce the supply curve
00:49:26.140
...the demand curve when you reduce
00:49:29.610
the demand curve price necessarily goes down.
00:49:35.310
The opposite of what the supply reducing the supply curve does so you start out with this amount of
00:49:36.800
money.
00:49:40.940
Right here being spent and if the drug if you program is
00:49:42.290
effective in the
00:49:48.530
sense of shifting supply demand curve then you actually solve your problem now just
00:49:53.480
second there's one problem with this of course is what if you...not effective it, you
00:49:59.380
know, you can be throwing money down the drain but not being able to reduce the supply the demand curve.
00:50:02.510
The difference on these two arguments is.
00:50:07.160
If the drug program is successful in shifting the supply curve
00:50:13.150
it necessarily makes things worse so it's one of those things that if you succeed you necessarily
00:50:18.150
The demand curve if you're successful at least you're going to win.
00:50:23.670
So, either don't do anything or do it that way?
00:50:24.170
Okay.
00:50:29.050
So, you next wednesday monday is not a...a holiday.

Video OCR Contents
Download Output File
Time
Texts
Demand and Supply Determines price of each good and Ole amount that is sold. Example: Salmon!
Price 12.000 $8 $6 $4 Demand Quantity demanded pounds 18, 000 pounds 24, 000 pounds Lees these number.
Price The vertical axis is the PRICE of salmon, in dollars per pound.
The horizontal axis is the QUANTITY of salmon that consumers buy, in thousands of pounds. Quantity
$8 At price of S8, consumers buy 12 thousand pounds. 12
At S4 per pound, consumers buy 24 thousand pounds. $8 $6 12 18
$8 $6 $4 12 Connect these points and all in-between points. 18
$8 $6 $4 12 This line is called the demand curve. Demand 18
Demand Curve Gives quantity that consumers buy at each price. Demand
Price p' Law of Downward-Sloping Demand
Price Law of Downward-Sloping Demand
Price p' Law of Downward-Sloping Demand
Price Law of Downward-Sloping Demand
Price p' Law of Downward-Sloping Demand When price drops, the quantity demanded rises, all else held constant.
Price Law of Downward-Sloping Demand When price rises, the quantity demanded drops, all else held constant.
Shifts in Demand Curve Rise in income causes demand Curve for salmon to shift outward.
Law of Downward-Sloping Demand When price rises, the quantity demanded drops, all else held constant-
Shifts in Demand Curve Rise in income causes demand Curve for salmon to shift outward.
Shifts in Demand Curve New showing that salmon not so healthy causes demand curve to shift inward.
Shifts in Demand Curve Drop in price of halibut causes demand Curve for salmon to shift inward.
Change in quantity demanded -18
$6 Change in quantity demanded 18
Change in quantity demanded
$6 Change in quantity demanded 18
Change in quantity demanded -18
$8 $6 12 Change in quantity demanded Movement along demand 18
$8 $6 12 Change in quantity demanded Movement the demand Curve 18
$6 11 Change in quantity demanded Movement of the demand curve 18
$6 Change in quantity demanded Movement of the curve 18
$6 11 Change in quantity demanded Movement Of the demand curve 18
Price $8 $6 Supply Quantity supplied 28, 000 pounds 18, 000 pounds 8, 000 pounds Let's graph with these numbers.
The horizontal axis is the QUANTITY of salmon that firms provide, in thousands of pounds. Quantity
When price is S4, fishing operators provide only 8 thousand pounds. 8
At $8, fishing operators provide 28 thousand pounds. 18
$6 $4 8 Draw a line that connects these points and all in-between points. 18
This line is called the supply curve. 18
Supply Curve Gives quantity that firms at each pnce. Supply
Price Shifts in Supply Curve A reduction in cost of motor fuel causes supply curve to shift outward.
Supply Curve Gives quantity that firms at each pnce. Supply
Supply Cu 'e Quantity
This line is called the supply curve. 18
This line is called the supply curve. 18
This line is called the supply curve. 18
Shifts in Supply Curve A reduction in cost of motor fuel causes supply curve to shift outward.
Supply Curve Gives quantity that firms provide at each pnce. Supply
Supply Curve Gives quantity that firms at each Supply
Shifts in Supply Curve A reduction in cost of motor fuel causes supply curve to shift outward.
Price Shifts in Supply Curve Bad weather causes supply curve to shift inward.
Shifts in Supply Curve Bad weather causes supply curve to shift inward.
Demand and Supply
Demand and Supply Supply
Demand and Supply Supply
Demand and Supply Supply
Demand and Supply Supply
price Suppose price is $4. Firms provide 8 thousand pounds of salmon. Supply 8
Price But consumers want to buy 24 thousand pounds. Supply 8
price $4 But consumers want to buy 24 thousand pounds. Supply 8
Price $4 But consumers want to buy 24 thousand pounds. Supply 8
supply Shortage $4 8
Supply
Price Shortage causes price to rise. Supply
Shortage causes price to rise. Supply
Suppose price is $8. firms provide 28 thousand pounds of salmon. Supply
But consumers only buy 12 thousand pounds. Supply $8 12
Surplus 12 Supply
Surplus
Surplus Supply
Surplus -12
Surplus 12 Supply
Surplus Supply
Surplus 12
Surplus Supply
Surplus
Surplus 12 Supply
Surplus 12
Surplus Supply 12
Surplus -12 Supply
Surplus Supply
Surplus 12
Surplus 12
Surplus 12 Supply
Surplus Supply
Surplus 12 Supply
Surplus Supply
Surplus Supply 12
Surplus
Surplus Supply
Surplus 12
Surplus causes price to drop. Surplus Supply 12
Equilibrium At S6, the quantity that firms provide is the same as the quantity that consumers want to buy. Supply $6 18
Equilibrium: No shortage or surplus. Supply $6 18
Equilibrium: No tendency for price to change. Supply $6 18
Equilibrium: No shortage or surplus. Supply $6 18
What happens if the demand curve or the supply curve shifts?? How does the equilibrium price change?
price $6 Outward shift in demand curve causes price to rise. Supply Old D 18
price $7 $6 Outward shift in demand curve causes price to rise. Supply 18 D 23 New D
price Outward shift in supply curve causes price to drop. S 18 21
Outward shift in supply curve causesprice to drop. Old S $6 $5 18 21 New S
Let's use demand and supply to examine The WAR on DRUGS
Demand curve for drugs The demand curve is steep: addicted people buy the drugs even if price is high.
Add the supply curve. Supply
Add the supply curve. Supply
Equilibrium price and quantity Supply
Amount of money that drug users spend on drugs. Supply
Amount of money that drug users spend on drugs. Supply P a
Amount of money that drug users spend on drugs. Supply Mangy an drugs:
What is the effect of the war on drugs? The war on drugs attempts to prevent drugs from entering the country and imprison drug dealers. These activities reduce the supply of drugs.
The war on drugs causes the supply curve to shift inward. Old S
Price rises. Quantity drops. Now S Old S New Q
Amount of money spent on drugs. New p New Q Ncw S Old S Money spent on drugs aner war on drugs
The war on drugs decreases the quantity of drugs slightly. Now S Old S New P Old p Demand NewQ Old Q
The war on drugs INCREASES the amount of money spent on drugs. New P • p Ncw S Old S Drug revenues before war on drugs Old Q
The war on drugs INCREASES the amount of money spent on drugs. New p p Old Q Ncw S Old S Drug revenues war on drugs
What would help? Education and rehabilitation programs affect demand.
An inward shift in the demand curve reduces price and quantity. Supply
An inward shift in the demand curve reduces price and quantity. Supply New p New Q
An inward shift in the demand curve reduces price and quantity. Supply Old p Old Q
An inward shift in the demand curve reduces price and quantity. New p New O New Q Supply Old O
An inward shift in the demand curve reduces price and quantity. Supply Old p Old Q
Demand and Supply
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