NEW- Micro Unit 2 Summary- Supply and Demand

Hey Econ students, this is Jacob Clifford. Welcome to the Microeconomics  Unit 2 summary video. In these summary videos, I explain all the  concepts that you need to know for your next quiz, unit exam, or final exam, basically  everything you need to get an A in the class.

But remember this is a summary video so  I'm going pretty quick. If you need more help take a look at my other videos on YouTube. This video is going to cover  Unit 2: Supply and Demand.

Before we jump into it make sure you have  the study guide that goes along with this video. So right now pause this video  and download and print the steady guide. Let's start with a quick overview.

Here are the five big-picture ideas you  need to know for this unit. #1: The law of demand shows a  negative relationship between price and quantity demanded  and the law of supply shows a positive relationship between  price and the quantity supplied. #2.

Elasticity measures the responsiveness of  one economic variable to a change in another. #3. Consumer surplus, producer surplus, and deadweight loss are used to analyze the  efficiency and welfare effects of a market.

#4. A demand and supply graph  shows the equilibrium price and equilibrium quantity and can be used to  predict and analyze changes in a market. #5.

The effects of government  intervention like taxes, subsidies, tariffs, and price controls can be  analyzed using supply and demand. That's an overview, so now  let's jump into specific topics. You learn this in your class.

It all  starts off with some basic definitions. Demand is the different quantities the consumers  are willing and able to buy at different prices. And there's the law of demand.

It shows an inverse relationship between price  and the quantity demanded. If the price goes up, the quantity  people want to buy is going to fall. If the price goes down people  are going to want to buy more.

Now there are three reasons for,  or causes of, the law of demand. The first is the substitution effect.  It's the idea that people buy fewer units when the price goes up because  they go buy a substitute instead.

And when the price falls, they buy more because the product is now relatively  cheaper than other substitutes. The income effect is the idea  that people buy fewer units when the price goes up because  they have less purchasing power. Their money doesn't go as far  so they're going to buy less.

And when the price falls, people  purchase more because they can buy more. And the third reason for the law demand is  the law of diminishing marginal utility. "This is worth at least 50 utils" As more units are consumed the price that  consumers are willing to pay is going to fall because people get less and less additional  satisfaction from each additional unit.

This is a demand schedule for a  market and it shows the different quantities that consumers are willing  and able to pay at different prices. And it shows the law of demand.  When the price is lower, consumers are willing able to purchase more.

A market demand schedule is made up of  individual demand schedules showing the preferences of specific people. And,  each are subject to the law of demand. This law is shown on a graph with  a downward-sloping demand curve.

If the price falls, more people  will be willing and able to buy. If the price goes up, less people  will be willing and able to buy. So a change in the price of the product  moves along the demand curve, but if something else other than the price changes  that could cause the demand curve to shift.

For example, if there's suddenly  more consumers in the market. That would cause the demand  curve to shift to the right so at every single price people  are willing and able to buy more. But if it was found this product gets people sick, then the whole demand curve  would shift to the left.

At every single price people will  be willing and able to buy less. Now there are five shifters, or determinants, of  demand. There's taste and preferences, number of consumers, price of related goods (substitutes  and compliments), income, and future expectations.

And there are a few details here.  For the price of related goods, remember the difference between  substitutes and complements. Substitutes are goods and services that  can be used in place of each other, and complements are goods and  services that are used together.

For income, remember the difference  between normal goods and inferior goods. For normal goods, when income increases then  the demand increases. For inferior goods, when incomes go up the demand falls.

An example is Top Ramen. When there's a recession and incomes are falling people  actually might be buying more. The best way to make sure you understand  those shifters is to practice, so here we go.

What happens to the demand curve  for milk if the price of milk falls? Nothing The demand doesn't shift. Remember a  change in the price of the product moves along the curve.

Just remember  price doesn't shift the curve. "don't forget, price doesn't  shift the curve! Yeah thank you.

" Okay, new question what happens to the demand  curve for milk if the price of a substitute falls? This would cause the demand for milk  to decrease and shift to the left. At every price, consumers are willing  and able to buy less because the price of a substitute has fallen.

They're  going to buy the other good instead. Now you might be thinking to yourself,  whoa, whoa, whoa, you just said price didn't shift the curve and all in the price of  the substitute that caused the curve to shift. Yes, a change in the price of the product  doesn't shift the demand curve but this is talking about a change in the price  of a different product, a substitute.

To clarify, a change in the price of the  actual product moves along the demand curve, and that's called a change in quantity demanded. If one of those five shifters  change, that's a change in demand. It seems like the same thing, but trust me I guarantee your teacher is  going to ask you a question about that.

All right! That's it for demand. Let's make sure you're getting it.

Pause this video and  fill out topic 2. 1 in your study guide. Now all of this also applies to the supply curve.

Supply is the different quantities that producers  are willing and able to sell at different prices. And, there's also a Law of Supply showing a direct relationship between price  and the quantity supplied. When the price goes up, producers want to  produce more.

When the price goes down, producers are going to produce and sell less. This is because when the price  goes up producers are going to make more profit so they want to sell more. When the price goes down, eh I'm  going to sell less because why bother.

So that means there's an upward-sloping  supply curve which also has its own shifters. The price of resources, or inputs, the number of  producers, technology, government intervention, like taxes, subsidies, and regulation,  and expectations of future profit. Again let's practice.

Show what  happens to the supply curve for milk if the price of milking machines increases. Milking machines are a key resource for producing milk so the supply of milk is  going to shift to the left. At every price, milk producers are going  to be willing and able to sell less milk.

That's it for supply. To make sure getting  everything fill out Topic 2. 2 on your study guide.

Before we put supply and demand  together, let's talk about elasticity. For most students, this is the hardest topic in this unit because it does require you  to do some math. But don't freak out!

The general idea is pretty  simple. Elasticity shows how sensitive quantity is to a change in price. In other words, we know that an increase in  the price is going to change the quantity demanded and the quantity supplied  but how much is it going to change?

Will the quantity change a lot or just  a little? That's the idea of elasticity. There are four types of elasticity and  four equations that you have to know: price elasticity of demand,  price elasticity of supply, cross-price elasticity of demand,  and income elasticity of demand.

The price elasticity of demand measures how  sensitive quantity demand is to a change in price. The equation is the percent change in  quantity divided by the percent change in price. Your teacher or professor very rarely  is going to give you the percent change so that means you have to be able to  calculate it given the raw numbers.

The good news is that I have a trick for you. Whenever you see questions that require you to calculate percent change,  remember to say "NOO! " N.

O. O It's the new number number, minus the old  number, divided by the old number, times 100. So if the price decreased from $15 to $12 the  percent change is 12 - 15 / 15 * 100 so - 20%.

Now if that 20% decrease in the price resulted in a 60% increase in the quantity the  demand would be relatively elastic. Remember if the absolute value of the price  elasticity of demand is greater than one then the demand is relatively elastic, meaning  quantity is very sensitive to a change in price. If that coefficient is less than  one then the demand is relatively inelastic meaning quantity is less  responsive to a change in price.

A coefficient of one means it's unit elastic so the percent change in quantity and the  percent change in the price are the same. And, if it's zero the demand  is perfectly inelastic meaning consumers are going to buy the same  amount even if the price goes up. Notice the more inelastic the  demand the more steep the demand curve but elasticity is not the same as slope.

In other words, a demand curve  with a constant slope can have a different elasticity depending on where you are. At higher prices and lower quantities,  the demand is generally more elastic and at lower prices and higher quantities  the demand tends to be more inelastic. And different products have  different elasticities.

It all comes down to the availability of  substitutes, the necessity of the product, the proportion of income spent on the  good, and the time period considered. Now there's one more thing you have to  learn about the elasticity of demand. It turns out that this equation is not  the only way to determine the elasticity of the demand curve.

The other way  is called the total Revenue test. It involves looking at the total revenue  before and after the change in price. For example, if the price is $20 and the  quantity demanded is 10 then the total revenue is $200.

If the price falls to $15  causing the quantity demanded to increase to 20 then the total revenue is $300. This means the  demand curve in that range is relatively elastic. You could calculate percent change and do  it the other way, but you don't have to.

The total revenue test says that demand  is elastic if the price falls and total revenue goes up, or if the price price  goes up, and the total revenue falls. And the demand is inelastic if the  price falls and total revenue falls, or if the price goes up and  the total revenue goes up. But remember the total revenue test only  works for demand.

It doesn't work for supply. Now I threw a lot at you so  it's time to practice take out your study guide fill out Topic 2. 3.

Good luck! If you understood price elasticity  of demand then you'll definitely understand price elasticity of supply. It  measures how sensitive quantity supplied is to a change in price and the equation  is almost identical and just like demand.

If the coefficient is greater than one then  supply is relatively elastic. If it's less than one then supply is relatively inelastic, and  if it's equal to one then it's unit elastic. And things like paintings by Van Gogh  are actually perfectly inelastic.

The quantity supplied is not going to  change even if the price goes up. So different products have different  elasticities of supply. It all comes down to how difficult it  is to produce the product.

For example, products with few sellers or  specialized inputs or that require a long time to produce have more inelastic supply. Quantity  supplied is less sensitive to a change in price. But if the product is relatively easy to produce and a small change in price can lead to  a huge change in the quantity supplied.

I think you get it, go ahead and fill  out Topic 2. 4 on your study guide. There are two more types of elasticity and  two more equations that you need to know.

Cross-price elasticity of demand measures  how sensitive the quantity demanded of what product is to a change in the  price of a different product. If the coefficient is positive then the two goods are substitutes. If it's negative  then the two goods are complements.

Income elasticity to demand measures how sensitive  quantity demanded is to a change in income. If the coefficient is positive then that's a normal  good. If it's negative it's an inferior good.

Now be careful here! When we did elasticity  of demand we kind of ignored the sign. We looked at the absolute value but when you're  doing cross-price and income elasticity the sign really matters.

Make sure you  know if it's positive or negative. The point is, read these questions carefully  to see if the price or income increased or decreased and indicate if the percent  change is a positive or a negative. It's those small details that might trip you up on your exam.

And it's why it created a  different resource to help you practice. There's an elasticity practice sheet  inside Unit 2 in my ultimate Review Packet. It's designed to help you practice  the equations to make sure you're getting it.

It's free. You can download it and do those  questions after you're done watching this video. But right now, it's time to pause  and fill out Topic 2.

5 in your study guide. Now it's time to put supply  and demand together. So right here is the equilibrium price and quantity.

This is the only price where the quantity  demanded equals the quantity supplied. And, we assume that's where we're going  to be in a competitive market. When the price is too high and  above equilibrium then there's a surplus and eventually prices will  fall because sellers have all these extra units they're going to lower  the price so people will buy them.

And when the price is below equilibrium and  there's a shortage. Eventually prices will go up because consumers will bid up those prices. The point is, always assume we're  at equilibrium unless something weird is going on in the market, which  we'll learn about later in this unit.

Economists look at the efficiency of a market by looking at the benefits it  provides to buyers and sellers. Consumer surplus is the difference  between what consumers are willing to pay, the demand curve, and the equilibrium price. Producer surplus is the difference between the price and how much sellers  are willing to sell goods for.

Now remember not only do you have to find  these on the graph you also have to be able to calculate them. It's relatively easy. It's just  the equation for a triangle 1/2 base times height.

Now when you put consumer surplus and producer  surplus together that gives you total surplus. And when this is maximized the market  is efficient. Buyers and sellers are getting as much benefit as they can  at this socially optimal quantity.

But what happens when we produce less and  we're over here? Well then we end up with deadweight loss, which is lost consumer and  producer surplus and an inefficient market. And remember it can be on either side.

If we  produce too little we end up with deadweight loss right here. And if we produce too much  we end up with deadweight loss right here. We're going to come back to this idea later  in this unit and in future units.

For now it's important for you just to be able to spot and  calculate consumer surplus and producer surplus. Which is why you should stop pause the video  and fill out topic 2. 6 on your study guide.

Topic 2. 7 starts by going back and  looking at the idea of disequilibrium. Just remember when the price is above equilibrium the quantity supplied is greater than  quantity demanded so there's a surplus.

And when the price is below equilibrium the quantity demanded is greater than the  quantity supplied and 's a shortage. A good way to remember that is the price  is low it's short so there's a shortage. Probably the most important skill in this unit  is this next part showing changes in a market.

"You want to talk about a supply and  demand problem. I sell ice for a living" When it comes to these  questions there are three steps. Step one is draw supply and demand and label  the original equilibrium price and quantity.

Step two is analyze the change is  it going to affect supply or demand. What's the shifter? Drw and label that new  curve and don't forget to draw an arrow.

And step three is the most important one,  identify the new equilibrium price and quantity and say what happened. Did price  go up or down? Did quantity go up or down?

And remember that's what we're doing here. We're trying to predict what's going to happen  when there's a change in the market. What's going to happen to price and quantity?

"Oh, that's a rough business to be in right  now. I mean that is really that's unfortunate" Let's practice! Drw a market for ice  cream and show what'll happen if the price of cream and input significantly decreases.

You start with a graph showing the  original equilibrium. We're analyzing ice cream and the price of an input fell  so that's going to affect the supply. The supply is going to shift to  the right.

So make sure to draw and label that and have an arrow. Now  label the new equilibrium price and quantity and at the bottom say price  went down and the quantity went up. Now I know it seems like there's  a lot going on here but remember there's only four things that  can happen: demand can increase, demand can decrease, supply can  increase, or supply can decrease.

It's easy. . .

except when there's double shifts. Sometimes you might see a question  that explicitly tells you that both demand and supply shifted. When you see  that remember the double shift rule: when two curves shift at the same time, either  price or quantity is going to be indeterminate.

In other words, you won't be able to  tell. It could go up or it could go down. Let's practice.

Assume you have  a question that says the demand's going to fall and the supply is going to fall  what's going to happen to price and quantity? To get the answer just draw the graph.  Remember, "when in doubt, graph it out.

" A decrease in demand will cause the price to  go down and the quantity to go down. And a decrease in supply will cause the price  to go up and the quantity to go down. Ao no matter what happens the quantity  is definitely going to decrease.

The price might go up it might go down so  that's the one that's indeterminate. o Or your teacher might use the term "ambiguous". Either way you don't know.

It might  go up might go down. You can't tell. But remember, this is only for  double shifts.

When it comes to single shifts you know exactly what's  going to happen, price goes up or down, quantity going to go up or down. For double  shifts something's going to be indeterminate. At this point you definitely need  to practice so let's see what you know take a look at topic 2.

7  on your study guide. Good luck. Now here in topic 2.

8 we're talking about how  government intervention affects demand and supply. It all starts with the idea of price controls, when the government artificially keeps  prices above or below equilibrium. This is the idea of a price ceiling, or a cap  on prices.

At first glance you probably thought it's going to help consumers because it keeps  prices down, but that also means producers are not going to produce as much stuff. So  we're going to end up with a shortage. But the real question is can you spot consumer  surplus, producer surplus, and deadweight loss?

Here they are. Consumer surplus,  producer surplus, and deadweight loss. We're not producing the socially optimal  quantity and this market is inefficient.

The opposite of this is a price floor which keeps  prices artificially high. The government is saying you can't lower the price below a certain level.  The result is that consumers are worse off so here's consumer surplus and here's producer  surplus.

And, again, we have deadweight loss. But like I said before, being able  to spot them is important you also have to be able to calculate them. Which  you're going to do inside the study guide.

But watch out here! Teachers and  professors love giving you a price ceiling or a price floor that's in the wrong spot. For example, your next quiz or  test we have a question where it says what happens when there's a  price ceiling ABOVE equilibrium.

The answer is nothing. It's not  binding. It has no effect.

It's like if the government told gas stations  they can't sell gas for more than $200 a gallon. No one's trying to do that so  it's not going to affect the market. Just remember that price ceilings are only binding if they're below equilibrium and price floors  are binding when they're above equilibrium.

Now let's take all these concepts you  learned and apply them to the idea of taxes. A per unit tax on producers will  cause a supply curve to shift to the left because producers now have higher costs. That vertical distance is the amount  of the tax per unit.

The result is that consumers pay a higher price, but  that's not the price that sellers receive. Remember the sellers have to pay that tax  so this is the price that sellers receive because that vertical distance is  the amount of the tax per unit. Now we multiply that tax times  the quantity that gives you the total tax revenue that goes to the government.

Let me explain that again,  in case you're confused. Before the tax, all the money that consumer spent the total expenditures was equal to  the total revenue the sellers received. After the tax, the total amount that consumer  spent is here but sellers only got to keep this total amount because the rest went  to the government.

Does that make sense? Now you should also be able to spot  and calculate consumer surplus, producer surplus, and deadweight loss. Again I'm going to have you do the  calculations inside the study guide.

For now let's see if you can spot them. Try  to find consumer surplus, producer surplus, and deadweight loss after the tax. After the tax, consumer surplus is here. 

Producer surplus is here. And, if that original quantity is socially optimal,  then here is the deadweight loss. There's one more thing you  have to know about taxes.

It's the idea of tax  incidence, or who pays the tax. Notice that the tax increased the price the  buyers had to pay but it also decrease the amount the sellers receive. In other words, both  buyers and sellers share the burden of the tax.

The easiest way to spot it  is identify how much that tax revenue dig into consumer  surplus or producer surplus. For example if the demand is more inelastic than the supply then consumers pay  a higher portion of that tax. And if the supply is more inelastic than demand  then producers pay a larger portion of that tax.

The big takeaway here is the burden of  the tax and the amount of deadweight loss depends on the relative elasticity  of the demand and supply curves. Now I know I covered that fast. If you need  more help with ceilings and floors or taxes take a look at my videos on YouTube.

But if you  can answer the questions in the study guide, you totally understand it.  Fill out Topic 2. 8.

Good luck. Okay there's one more thing we have to  talk about, it's international trade. You know from comparative advantage  in unit one that countries benefit from trade and now we can show  that using supply and demand.

This is a domestic market for sugar  showing the equilibrium price and quantity if we produce sugar in our own country. Question, what happens to the  consumer surplus, producer surplus, and deadweight loss if instead we can  get sugar at a cheaper world price? Pause the video and see if you can figure it out.

At this price, domestic producers will produce this amount, but consumers want more  so we're going to import the rest. The total amount purchased is here, so  consumer surplus is this big triangle. This is producer surplus and  there's no deadweight loss.

We actually have the opposite  of dead weight loss. We have more total surplus because consumers  benefit from international trade. But notice who doesn't like international trade, domestic producers because  producer surplus got smaller.

And this is why domestic producers  often lobby policy makers to avoid international trade at least have some tariffs. If there was a tariff of $10 then  the world price would go up to $20. Consumer surplus would get smaller. 

The producer surplus would get bigger, and this is the tariff revenue  that goes to the government. And that tariff would cause deadweight loss  which is these two triangles right here. If you're still confused take a look at the  international trade video I made on YouTube, but right now let's see what you know  fill out Topic 2.

9 on your study guide. Okay you're done with your study guide,  but you probably should still practice. I suggest you go back to the ultimate  review packet and do the multiple choice questions for this unit and fill out the  practice sheet for elasticity.

Try those questions and look at the answer key  to see if you got them right, okay? That's it for microeconomics unit  2 if this video helped you please like leave a comment and subscribe.  Thanks for watching.

Till next time! "Don't forget price doesn't shift the curve.