Tip:
Highlight text to annotate it
X
>>Shopkeeper: Hi there, how can I help you?
>>Man: Hi there, I need to chop down some tress but first I need an axe.
>>Shopkeeper: Well then, you have come to the right place. We have many different kinds of axes, come have a look.
We have diamond axes, stone axes, wooden axes and golden axes. Which one would you like?
>>Man: I'd like a diamond axe please.
>>Shopkeeper: That will cost you forty gold ingots.
>>Man: Okay.
Oh no! I only have twenty ingots.
I don't have enough ingots to buy the axe.
>>Professor: Demand is the various quantities of a good or service that consumers in the market
are willing and able to buy at different possible prices during a particular time period, ceteris paribus.
Here, because this man cannot afford the axe, he is willing but not able to buy it.
At a price of forty gold ingots, this axe does not meet his demand.
>>Man: What can I do? Ah, I know, I can rob a bank.
Ha, now I have enough ingots to buy my axe.
Here are the forty ingots for the axe.
>>Shopkeeper: Thank you!
>>Professor: Because the man can now afford the axe, he is willing and able to buy the axe.
Now, at a price of forty gold ingots, the axe meets his demand.
>>Pig: What does the demand curve look like?
>>Professor: This is the demand curve, the y-axis is the price and the x-axis is quantity.
The curve is downward sloping because according to the law of demand
there is an inverse relationship between the quantity of a good demanded of a particular time period and its price, ceteris paribus
As the price of the good increases, the quantity of the good demanded falls. As the price falls, the quantity demanded increases, all other things equal.
There can be situations in which the curve shifts. For example, trends.
Let's say people like to dress in brown. There are few people who like to wear silver clothes.
But what if the trend changes and people suddenly like to wear silver?
Then the demand for silver clothes increases and the curve shifts to the right.
>>Farmer: Hello, I'm a farmer and this is my farm.
With the wheat that I harvest, I make bread, which I then sell to my customers in the market.
Hmm, how many buns should I produce then?
Well, if customers will pay one gold ingot for each bun then I guess I'll produce one hundred buns.
But what if customers will buy my buns for two ingots each?
Then I guess I'll produce more so I can earn more money! I love money!
>>Professor: Supply is the various quantities of a good or service that firms are willing and able to produce and supply to the market for sale
at different possible prices during a particular time period, ceteris paribus.
In this case, the farmer supplies buns to the market for buns.
>>Pig: What does the supply curve look like?
>>Professor: As you learned just now, the higher the price the farmer can sell his bread at, the more he will produce and supply to the market.
Therefore, price and quantity supplied share a positive relationship.
The supply curve therefore slopes upwards to the right.
>>Pig: Is the supply curve stationary?
>>Professor: Of course not, like the demand curve, it can be shifted by determinants of supply.
An example would be supply shocks, which are basically sudden events that have an impact on supply.
>>Bad guy: Oh hi, I'm a bad person and I'm going to bomb that farm.
I don't know why I have to do it, but I'm going to do it anyway.
>>Farmer: What the...?
NOOOOOOOOOOO!!!!
>>Professor: Because the bad guy has bombed the farm, the farmer cannot produce as much as before.
For each price, the quantity of bread that he can supply is less than before so the entire supply curve shifts to the left.
That's it for supply.
Up till now we have been examining demand and supply separately.
We do not know how much consumers and firms will buy and sell their products,
nor do we know the quantities of such goods there will be in the market.
To know how the market actually works, we need to find the equilibrium of the market,
which is basically the state of the market when the forces of demand and supply are in balance,
and there is no tendency for the quantity and price to change.
Do you understand what I just said? Of course not.
Let's put it this way, to find the equilibrium state of the market,
we put the demand curve and the supply curve together in one graph.
As you can see, the two curves intersect.
The price of the equilibrium point is called the market clearing price, while the quantity of the equilibrium point is called the equilibrium quantity.
At any price other than the equilibrium price, there is market disequilibrium,
and the "invisible hand of the market" will force the price to increase or decrease until it reaches the equilibrium level again.
>>Pig: Is the equilibrium point fixed?
>>Professor: Of course not! Let's look back at the farmer's case.
The bombing of his farm is a supply shock, and that causes a shift of the supply curve to the left.
The new intersection is much higher on the graph, and further to the left.
Therefore, the new equilibrium price is higher than before, and less bread is supplied.
People will have to pay more because there is less bread available.
>>Customer: What? You're telling me that a bun costs me 10 gold ingots? I can buy a house with that!
>> Farmer: I'm terribly sorry, but if I don't charge you that much I can't earn enough by selling the few buns I have!
>>Customer: How dare you! I'll kill you!
>>Professor: That's it for market equilibrium! Good work guys, now you understand demand and supply.