WEBVTT

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Suppose we are studying one
ordinary market, perhaps sacks

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of flour sold during one week.

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Two measurements matter.

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Price tells us how much one sack costs,

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and quantity tells us how
many sacks are bought and sold.

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Put quantity across the bottom
and price up the side. A point

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in this picture is one possible pair,
one quantity together with one price.

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Our first question concerns buyers.

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At each possible price, how many
sacks would they choose to purchase?

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A demand curve collects all those answers.

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This blue line is the demand curve.

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It slopes downward because,

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with other influences held fixed, a lower
price usually makes buying attractive

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to more people and makes some
existing buyers willing to buy more.

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That final qualification matters.

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We are comparing prices while income,

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preferences, the number of buyers, and
other market conditions remain the same.

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The curve is a controlled comparison,

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not a claim that nothing else
in the world can ever change.

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For a concrete example,

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let the demand rule be price equals
one hundred minus two times quantity.

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At quantity twenty,
the corresponding price is sixty.

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Read that point in the direction
buyers actually face the choice.

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If the market price is sixty,
buyers choose quantity twenty.

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The graph and the equation
are saying exactly the same thing.

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Now let the price fall
from sixty to forty.

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We do not draw a new demand curve.

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We travel down and to the right on
the blue curve, reaching quantity thirty.

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This is called an increase
in quantity demanded.

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It is movement along the existing
demand curve, caused by the change

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in the product's own price.

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The relationship represented
by the blue curve has not changed.

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Reverse the experiment.

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Let price rise to eighty.

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Buyers move up and left on that same
curve, and quantity demanded falls to ten.

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Again, the curve itself did not move.

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A different price selected a different
point from the same list of buyer choices.

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Price change means movement along demand.

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Return to price sixty and quantity twenty.

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Keep that point in mind, because later
we will change something other than price.

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When that happens, one blue curve will no
longer contain the buyer choices we need.

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Buyers are only half the market.

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Sellers also make a choice.

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At every possible price,
how many units are farms,

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shops, or factories willing
to produce and offer for sale?

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The green supply curve
collects those seller choices.

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It usually slopes upward.

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A higher price can cover
the cost of more difficult units

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and can make extra production worthwhile.

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Once again, other conditions are held
fixed. Technology, input costs, weather,

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taxes, and the number of sellers are not
changing while we trace this one curve.

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Use the supply rule price equals
twenty plus two times quantity.

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At price forty, sellers
choose to offer ten units.

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Raise the price to eighty.

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Sellers move up and right on the same
green curve, offering thirty units.

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This is an increase in quantity
supplied, not a shift of supply.

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A price change therefore
produces movement along supply,

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just as a price change
produced movement along demand.

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The slopes differ

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because buyers and sellers respond
to price in opposite directions.

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Now place buyer plans
and seller plans in the same market.

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The blue demand curve slopes down.

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The green supply curve slopes up.

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Their crossing asks whether
the two groups can agree.

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First try a price of eighty.

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At that price buyers want ten
units, while sellers offer thirty.

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Sellers are offering twenty
more units than buyers want.

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That excess is a surplus.

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Unsold goods give sellers
a reason to cut price.

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As price falls, quantity supplied moves
down its green curve and quantity demanded

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moves down and right on its blue curve.

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Now try a price of forty. Sellers
offer ten units, but buyers want thirty.

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Buyers want twenty more
units than sellers offer.

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That gap is a shortage.

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Competing buyers and sellers

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who see goods selling quickly
have a reason to raise price.

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Rising price reduces quantity demanded
and increases quantity supplied.

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The pressure to change
price stops at the crossing.

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At price sixty, buyers choose twenty
units and sellers offer twenty units.

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No planned purchases
or sales are left unmatched.

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Algebra reaches the same point.

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Set the demand price
equal to the supply price.

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Solving gives equilibrium quantity
twenty and equilibrium price sixty.

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Equilibrium does not mean

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that everyone loves the outcome
or that the market can never change.

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It means that, under the current
demand and supply conditions,

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buyer plans and seller plans
agree at one price and quantity.

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We now need the distinction that prevents
most early mistakes in supply and demand.

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Two pictures can contain a moving point,

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yet describe two completely
different economic events.

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First, movement along a curve.

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Begin at price sixty and quantity twenty.

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If this product's own price falls to
forty, quantity demanded rises to thirty.

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The blue curve did not change
its location, slope, or meaning.

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We simply selected another point
from the same relationship.

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The cause was a change
in the price shown on the vertical axis.

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Return to the original point.

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This time hold
the displayed price at sixty.

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Imagine that the product
becomes fashionable,

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so buyers want more of it even
though its price has not changed.

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Fashion is not the price of the product.
It is a non-price influence on demand.

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The old blue relationship
is no longer enough,

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because at every price buyers
now choose a larger quantity.

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Watch the entire red demand
curve shift to the right.

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In this inverse price picture
the same change also looks upward.

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The important fact is that every point
of the relationship moves together.

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At the unchanged price sixty,

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the old curve says quantity twenty
and the new curve says quantity thirty.

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That comparison at one fixed
price proves that this is a shift,

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not movement caused by price.

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The language is precise.

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A price change causes
a change in quantity demanded,

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represented by movement
along one demand curve.

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A change in taste
causes a change in demand,

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represented by a shift of the curve.

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Use the diagnostic every time.

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Did the product's own price change
while the relationship stayed fixed?

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Move along. Did income, taste, population,
expectations, production conditions,

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or the number of sellers change?

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Shift the appropriate curve.

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A single market story
can contain both actions.

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A non-price event shifts one curve first.

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The resulting change in equilibrium price
then produces movement along the other,

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unchanged curve.

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We will now repeat that order three times.

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Begin from the familiar equilibrium.

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Demand is blue, the original supply curve
is gray, and their crossing is price sixty

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with quantity twenty.

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Now imagine a bad harvest.

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Weather has destroyed part of the crop.

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At any given market price, farms
have fewer sacks available to sell.

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The product's current market
price did not cause the crop loss.

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Weather is a non-price
determinant of supply.

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Therefore this is not movement
along the old gray curve.

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Reveal the new supply curve on top

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of the old one, then let the entire
red relationship shift left and upward.

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At every price, the quantity
sellers can offer is smaller.

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Hold price at its old value of sixty.

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Buyers still want twenty units,
but the damaged harvest supplies only ten.

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The ten-unit gap is a shortage.

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A shortage puts upward pressure on price.

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As price rises, buyers move up and left
along the unchanged blue demand curve,

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reducing quantity demanded.

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At the same time sellers move
along their new red supply curve.

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The adjustment stops at the new crossing.

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Price is seventy and quantity is fifteen.

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The bad harvest has raised equilibrium
price and reduced equilibrium quantity.

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Name the two actions separately.

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Weather shifted the supply curve.

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The resulting rise in price moved
buyers along the demand curve.

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Calling the whole story movement along
supply would erase its actual cause.

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Reset the market
to the same starting equilibrium.

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Quantity is twenty and price is sixty.

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The old demand curve
is gray, and supply is green.

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Now suppose the product
becomes fashionable.

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Perhaps a popular recipe makes
these sacks of flour especially desirable.

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Buyers want more at each possible price.

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Taste is not the product's own price.

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Because a non-price
determinant of demand changed,

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the entire demand relationship must shift.

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This example uses a favorable
taste change, so demand increases.

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Place the new red demand curve over the
old one, then shift it right and upward.

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Every point moves

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because buyer willingness
has changed throughout the market.

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At the old price sixty,
sellers still offer twenty units,

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but buyers now want thirty.

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That ten-unit shortage shows why the old
price cannot remain the equilibrium price.

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Price rises.

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The supply curve itself has not shifted,

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so sellers respond by moving up
and right along that same green curve.

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The new equilibrium reaches
quantity twenty-five and price seventy.

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At the new crossing, both equilibrium
price and equilibrium quantity are higher.

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The favorable taste
change increased demand,

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and the resulting higher price
increased quantity supplied.

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Keep the grammar exact.

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Taste shifted demand.

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Price then caused movement
along unchanged supply.

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If the product had become less popular,

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demand would instead shift left,
reversing these directional pressures.

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Reset once more
to the original equilibrium:

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price sixty and quantity twenty.

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Demand is blue, original supply is gray,
and the yellow point is their crossing.

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Now a new competitor enters the market.

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There is another seller
with workers, equipment,

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and stock ready to serve buyers.

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At every given price, total
market production can be larger.

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Entry is not a change
in the product's market price.

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It changes the number of sellers,
a non-price determinant of supply.

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We therefore shift
the entire supply curve.

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Reveal the new red supply curve,
then shift it right and downward.

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At a fixed price, the combined
sellers now offer a greater quantity.

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Hold price at sixty.

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Buyers still want twenty units,
but sellers now offer thirty.

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The extra ten units form a surplus, so the
old price is too high to clear the market.

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Competition among sellers
puts downward pressure on price.

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As price falls, buyers move down and right
along the unchanged blue demand curve,

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while sellers move along
their new red supply curve.

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The new crossing has price
fifty and quantity twenty-five.

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Entry lowers the equilibrium price
and raises the equilibrium quantity.

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Again, two actions belong to one story.

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The competitor shifted supply.

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The resulting fall in price
caused movement along demand.

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The yellow point moved,

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but that does not make every part
of the story movement along a curve.

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Put the three experiments together.

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A bad harvest reduced supply,
so supply shifted left.

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Price rose and quantity fell.

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A favorable change in taste increased
demand, so demand shifted right.

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Both equilibrium price
and equilibrium quantity rose.

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A new competitor increased
supply, so supply shifted right.

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Equilibrium price fell,
while equilibrium quantity rose.

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Notice that quantity rose in the last
two cases, but for different reasons.

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Taste shifted demand and raised price.

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Entry shifted supply and lowered price.

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Watching quantity alone cannot
identify which curve changed.

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Price also rose in two cases.

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After the harvest, higher
price moved buyers along demand.

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After the taste change, higher
price moved sellers along supply.

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The initiating shifts were different
even though the price direction matched.

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So use this method. First identify the
event that happened before price adjusted.

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Decide whether it changes buyer choices
or seller choices at every price,

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and shift that curve.

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Second, inspect the old price.

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The shifted curve creates
a shortage or a surplus.

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That imbalance tells you
whether price rises or falls.

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Third, follow the price
adjustment to the new crossing.

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Price change moves the market
along the curve that did not shift.

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The new crossing gives the new
equilibrium price and quantity.

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A movement along a curve answers what
happens when price changes within one

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fixed relationship.

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A shift answers what happens
when the relationship itself changes.

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Market adjustment often
contains both, in that order.