Learn the toughest concepts covered in your Macroeconomics class with step-by-step video tutorials and practice problems.

Supply and Demand

Introduction to Supply and Demand



Introduction to Supply and Demand

Play a video:
Was this helpful?
Alright, we're gonna start our first big topic for this class, supply and demand for a product. We're gonna start with demand defining it, and understanding what kind of things could affect demand. And then we're gonna do the same thing with supply. You're actually gonna see a lot of similarities between the two. But first let's create the setting for our discussion. So in this chapter we are going to be dealing with products in a perfectly competitive market. So, Mark, it's pretty easy. A market is just a group of buyers and sellers. For a product, it could be any product, and it doesn't even have to be a physical location where this market exists. So if you want to buy cereal, there's people supplying cereal, there's a market for cereal. Now let's talk about a perfectly competitive market. So we're gonna define some things about the market that make it perfectly competitive here. So, the goods for sale in these markets are exactly the same. So what one person is selling um is exactly the same as from another one. You can't distinguish the product from one seller to another. They're exactly the same. And in these markets perfectly competitive markets have price takers for the buyers and sellers. So a price taker, price taker, um a price taker is someone who doesn't get to set the price right, They have to take the price that's given to them. And in this situation it's actually the market that's going to be setting the price and they're going to both. You take the price that is set by the market. So basically this this situation arises because there's lots of buyers for the product, right? Imagine if there was only one buyer for the product, you could imagine that they would have some influence over the price, right there. The only person buying it, they're going to influence what they're gonna buy it for the same thing with lots of sellers. If there was only one seller for a product, they would probably have some influence over the price as well. But in this situation we have lots of buyers, lots of sellers and nobody has influence over the price. Each market participant has no influence on price. You see it there. Alright, so let's go ahead and do um some examples, let's let's let's see some examples of what some products could be in these markets. And notice I put perfectly in parentheses here, because in the real world, it is kind of hard to find products that are in these perfect conditions like this, but we do get pretty close. So for example, um a good, a good example here is al agricultural products. So something like wheat or corn or something like that, that is going to be a product in a perfectly competitive market, right? It's very hard to distinguish one farmer's wheat from another farmer's wheat, right? Another good example would be um foreign exchange markets. So it's gonna be really hard to distinguish my dollar, that I'm trading from a euro from another dollar, right? The dollars are not going to be distinguishable from one or another. And I actually saw a really cool, perfectly competitive market in action last year I had the pleasure of traveling to Morocco for a little while and there I actually went to a spice market where everybody there was selling spices and the spices were exactly the same. Right? But why would they all be there? Well it kind of comes from tradition in that sense back in ancient times, right? When peop I wanted to go buy a product, they would go physically to the market and buy it right? There was no amazon, nothing like that. So how could they know they were getting the best price? Well these markets sort of naturally formed to make the best price. All the people selling spices would sell spices in the same place because they knew that's where the buyers were gonna go to buy their spices just like um the buyers new to go to this market where all the sellers were because they knew they'd get the best price if they went somewhere else where maybe there was just one guy selling spices, he could probably have more influence over the price. But in the market they're able to solidify a better price because all the sellers are competing in the same space. So that was actually pretty cool. I'll put that in here. The spice bizarre. I don't even know. Alright, so how about some products that aren't perfectly competitive here. One I like to think of is fast food. Right? So you might think, right, Mcdonald's sells a hamburger burger. King sells a hamburger, but they each have a little differentiation, right? One, the Mcdonald's Big Mac is different than the Whopper, right? Someone might prefer the Big Mac to the Whopper, something like that. So it's not perfectly competitive because the products aren't exactly the same there. Right. How about another one? Like Star Wars figurines. Now, what's the problem here? I would say in a market for Star Wars figurines, there's probably not lots of buyers and lots of sellers. I'm sure that they're going to have some influence over the price because it's very specific and it's like a collector's item. So I feel like it would be pretty tough to find a perfectly competitive market for Star Wars figurines. And the last one here. What about utilities, your power bill? Most, most uh cities have one power company or one water company, right? Maybe two. And they get to have some influence over the price. So you'll see that utilities don't work in a perfectly competitive market. Now I do want to make a note that in this chapter when we do examples, um we don't always use wheat, right? That would get kind of boring and actually a lot of what we learn in this chapter does does go over to less competitive markets, you will see that some of this discussion makes sense in other markets that are not perfectly competitive. But for our case, it just makes it easier. We're controlling a lot of our variables by saying we're in a perfectly competitive market. Cool. All right. So one last thing here, um they love to use this latin phrase, Severus Paradise, and it means um it means other things equal, right? So this makes a great multiple choice question on an exam. They love just, it sounds fancy, but the idea is throughout this chapter, we're going to be holding everything equal right? This is kind of like a control, right? So we're gonna analyze changes as long as everything else stays the same. This is what we would expect to happen, right? So, examples of things that might be held constant consumer income, right? The resources that the that the suppliers have or even acts of nature, right? These are all things that are gonna be held constant while we do our discussion. And then we can also see what happens when some of these things change as well by themselves. Cool. So why don't we go ahead and move on here?

Which of the following goods would most likely be sold in a perfectly competitive market?


Products sold in a perfectly competitive market are


The Latin phrase ceteris paribus means: