Supply and Demand Together: Equilibrium, Shortage, and Surplus

Alright. So now we have the tools to analyze supply and demand together on one graph we're gonna see how different price levels can affect the amount of quantity demanded and quantity supplied as well as see how markets tend to move towards equilibrium. So I use this word equilibrium and it really just means balance. We're gonna try and balance the market. So what does it mean for the market to be in balance? That is gonna be when the quantity demanded equals the quantity supplied. So the amount that people are willing to buy in the market is the same amount that the producers are willing to supply to the market at that price. Cool. So there is gonna be this equilibrium and at that equilibrium we're gonna have an equilibrium price and then equilibrium quantity. Right? So at this price we're gonna call it P Star, this Star means equilibrium. Right. That's the that's the notation that we use for the equilibrium price. And at that price, quantity supplied is gonna equal quantity, demand it. And the same thing with equilibrium quantity. We're gonna use a Q Star to tell us that it's the equilibrium quantity and this is gonna be the quantity at that price. Right. So I think it's gonna be really easy to see this on the graph. So let's go down here. Now if you guys were going to guess where equilibrium was on that graph, where would you guess? This would be my first guess. And I'm hoping that it was your first guest too. It's gonna be right here where the lines intersect. Right? So let's go ahead and label our graph. Right? We have our price axis here are quantity access over here. Right? And which line is supply and which line is demand? So demand. You remember demand? We've got the demand downward the double Ds. We know that this is our demand line right here and this is our supply line going up. And at that point where they intersect that is our equilibrium point. So at this point, let's notice a few things, notice what the price is here, We've got the price of six which is going to be what we call p star, right, equilibrium price. And let's go down on the quantity for each of the graphs let's look at the quantity supplied and the quantity demanded at this point. Well, at this point, right, We see on the red line, if we go down from that point We're gonna see a quantity of 10. Right? And that's the quantity I'm gonna put equals quantity supplied as well. As if you look on the blue line going down from that point, we're at the same point right. Which equals quantity demanded as well. So that is our cue star here at 10. Right? So we found our our equilibrium price and are equal equilibrium quantity by the intersection of the two lines on the graph. Pretty easy. We can also find equilibrium on a schedule like we have on the right here. So notice I've got our prices for Supreme Pizza and by the way, this is the same information that's on the graph, I've graphed the information from the schedule. Um and we're gonna find the same equilibrium in this schedule. So notice the way to find it here in the schedule is to find where the quantity supplied equals the quantity demanded. Right? And that was our definition of equilibrium. So let's look at all the different um quantity demanded and the different quantities supplied at the different prices. And you'll find that at a price of $6, we are going to have equal quantity supplied and quantity demanded. And that's exactly what we found on the graph as well. Right? So we've got our P. Star right here of $6 and our Q star is going to be these 10 units. Cool. I hope that makes sense. It shouldn't be too hard to find equilibrium. Um Let's go ahead and move on to the next video.

now let's see what happens in situations where the market price is not set at the equilibrium price. So it's not always gonna be an equilibrium, right? We're not perfect. Um There could be a situation where the price is set too high. Right? So if if the price is set above the equilibrium price we're gonna have what's called a surplus. And that surplus is when the quantity supplied, do it in red. The quantity supplied is greater than the quantity demanded. Right So think about what that means the quantity supplied being greater than the quantity demanded. That means that there was more being supplied than people wanted to buy. There's extra stuff here, there's what we call excess supply. Right? So let's look at this on a graph and let's see how this really works. So first thing let's go ahead and label our graph, we've got our price access here are quantity access here and which lines demand and which line is supply. We've got our demand downward double D. S. And then supply is just the other one. Cool. Alright so in this graph, just like in the video about equilibrium we have that equilibrium price here right where they cross is going to be six. But let's go ahead and say that the market price isn't six. The market price let's say is something higher than six. Like eight. I'm gonna put here P. H. For high price at eight. Cool. So our high prices eight let's see what the quantity demanded and the quantity supplied is at that price. So I'm gonna go ahead and go across to my demand line to see where I cross it and here is where I'm gonna cross my demand line Um at a price of eight. So let's see how much is the quantity demanded at this price? We're gonna go down, we're gonna be somewhere around here. Right, and we'll say uh this is the quantity demanded, I'm gonna put down there, I'm gonna put that in blue because our demand line is blue right here. So quantity demanded. And let's do the same thing, let's keep going. And at that price of eight let's find where we cross our supply curve. So we're gonna keep going here at that price of eight and here we are, this is where we're gonna pass the supply curve and let's find out what that quantity is over here. So we're gonna go down, we're gonna find a quantity supplied way up here. Right, so you can already see that the quantity demanded is less than the quantity supplied here. Right, we've got a lot more being supplied. I'm gonna put a little arrow in between here just to notice that there's a difference. Right? Um So what we have is this surplus and the surplus can be identified right here as this area. This Area right here, this is our surplus, right between the quantity demanded of about five units and the quantity supplied of 14 units. Cool. So let's try the same thing with a low price

now let's see a situation where the price is set too low. So when we have a price too low, we're gonna have what's called a shortage, meaning there's not enough in this situation right before we had too much. Now we have not enough. Now, the quantity demanded is gonna be greater than the quantity supplied. People want more than suppliers are willing to produce at the price. Okay, so let's go ahead just like before we had our equilibrium price of six here. Right, um Let's go ahead and set a low price. Um Let's go with four. The price of four here and well, first let's label our axes right? Price, quantity demand, double D. S going down, supply is the other one. So let's set our price too low here at four. So I'm gonna put P with an L. For low and that will be at four. And let's go ahead. And first, since supply comes first, let's go ahead and see what the quantity supplied would be at this price. So the price of four, it looks like suppliers are willing to put out six units. The quantity supplied is gonna be six units at a price of four. And how much are people gonna demand at this price? Hey, this is a really good price. $4. I want this many pizzas over here, right, 15 pizzas. The quantity demanded is way higher than the quantity supply. Right, we're seeing a big discrepancy here, we're not at equilibrium because the quantity supplied is not equal to the quantity demanded and we have what we're gonna call a shortage represented by this amount of quantity shortage right here, Right? So the shortage, in this case, if they were supplying six units and they're demanding 15 units, right? We have a shortage of nine units. Okay, alright, So we'll do one more thing here to talk about the law of supply and demand. Let's do that in the next video.

So we have what some books called the law of supply and demand. It's not as big of a concept that's pushed as like the law of supply and the law of demand that we covered earlier. But it's it is a good idea to kind of have in your head, just to understand the logic, and this law of supply and demand talks about basically that where the price is gonna constantly just trying to find the equilibrium price. Okay, so let's do an example here, as if we were in this situation in the market, right? Let's say that we're in the market for pizzas in your town, and we know the equilibrium price here being six, but the price was set too high to about eight, right? Um So in this situation at this price, they were supplying way too much, there was all this excess supply and all the suppliers had all these extra pizzazz lying around and they're like, what do we do with these pizzas? Let's lower our price, so we can get rid of the pizzas, Right. So they go ahead and they're like, all right, let's do a sale, we're gonna sell all these pizzas half off, right? So they get the sale and now they have a half off sale with all the pizza, and they end up somewhere down here, and they're like, whoa, now people are buying way too much pizza, we could probably be charging more money for these pizzas. So you can see what could happen, they're eventually gonna rise the price and see if there's still a shortage or a surplus, right? And eventually the market is going to find this equilibrium Of $6. Cool. So that's the idea of the law of supply and demand is that it's gonna kinda constantly adjust until it finds this equilibrium. Cool, let's move on.