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Format: Layer, Start, End, Style, Name, MarginL, MarginR, MarginV, Effect, Text
Dialogue: 0,0:00:00.00,0:00:02.88,Default,,0000,0000,0000,,♪ [music] ♪
Dialogue: 0,0:00:09.54,0:00:11.16,Default,,0000,0000,0000,,- [Alex Tabarrok] In this video, \NI want to review
Dialogue: 0,0:00:11.16,0:00:14.44,Default,,0000,0000,0000,,just a little bit equilibrium \Nand the adjustment process.
Dialogue: 0,0:00:15.02,0:00:17.99,Default,,0000,0000,0000,,Ordinarily, we won't be doing \Nmuch review in this class
Dialogue: 0,0:00:17.99,0:00:20.13,Default,,0000,0000,0000,,since you can always go back \Nand re-watch a video.
Dialogue: 0,0:00:20.78,0:00:23.58,Default,,0000,0000,0000,,But in this case I want to emphasize \Na few points
Dialogue: 0,0:00:23.58,0:00:25.27,Default,,0000,0000,0000,,and the material is very important.
Dialogue: 0,0:00:25.66,0:00:27.87,Default,,0000,0000,0000,,Let's review \Nbut we'll do so quickly.
Dialogue: 0,0:00:33.42,0:00:35.02,Default,,0000,0000,0000,,Okay, here's the equilibrium price,
Dialogue: 0,0:00:35.02,0:00:36.75,Default,,0000,0000,0000,,the price where \Nthe quantity demanded
Dialogue: 0,0:00:36.75,0:00:38.80,Default,,0000,0000,0000,,is equal to the quantity supplied.
Dialogue: 0,0:00:38.80,0:00:41.01,Default,,0000,0000,0000,,Why is that the equilibrium price?
Dialogue: 0,0:00:41.01,0:00:44.56,Default,,0000,0000,0000,,Because at any other price,\Nforces are put into play
Dialogue: 0,0:00:44.56,0:00:48.18,Default,,0000,0000,0000,,which push the price towards \Nthe equilibrium price.
Dialogue: 0,0:00:48.18,0:00:51.36,Default,,0000,0000,0000,,So at a price of $80 per barrel\Nfor example,
Dialogue: 0,0:00:51.36,0:00:53.51,Default,,0000,0000,0000,,we would have a surplus.
Dialogue: 0,0:00:53.51,0:00:56.99,Default,,0000,0000,0000,,The quantity supplied would be \Ngreater than the quantity demanded.
Dialogue: 0,0:00:56.99,0:00:59.93,Default,,0000,0000,0000,,Sellers have more goods \Nthan they have customers
Dialogue: 0,0:00:59.93,0:01:03.96,Default,,0000,0000,0000,,and because of that they had \Nincentive to push the price down
Dialogue: 0,0:01:03.96,0:01:05.91,Default,,0000,0000,0000,,towards the equilibrium price.
Dialogue: 0,0:01:06.54,0:01:08.91,Default,,0000,0000,0000,,What if the price is less than \Nthe equilibrium price?
Dialogue: 0,0:01:08.91,0:01:11.63,Default,,0000,0000,0000,,Well, in this case \Nthe quantity demanded
Dialogue: 0,0:01:11.63,0:01:13.91,Default,,0000,0000,0000,,will exceed the quantity supply.
Dialogue: 0,0:01:13.91,0:01:16.05,Default,,0000,0000,0000,,Buyers will want the good
Dialogue: 0,0:01:16.05,0:01:18.64,Default,,0000,0000,0000,,but there won't be enough\Nof the good to go around.
Dialogue: 0,0:01:18.64,0:01:20.44,Default,,0000,0000,0000,,In other words, \Nthere'll be a shortage
Dialogue: 0,0:01:20.44,0:01:23.58,Default,,0000,0000,0000,,because the buyers have to compete \Nto obtain the good,
Dialogue: 0,0:01:23.58,0:01:25.58,Default,,0000,0000,0000,,they're going \Nto push the price up again
Dialogue: 0,0:01:25.58,0:01:27.61,Default,,0000,0000,0000,,towards the equilibrium price.
Dialogue: 0,0:01:27.61,0:01:30.75,Default,,0000,0000,0000,,The equilibrium price \Nis the only stable price.
Dialogue: 0,0:01:31.23,0:01:34.57,Default,,0000,0000,0000,,There is similar kind of argument \Nwe can show why this quantity,
Dialogue: 0,0:01:34.57,0:01:36.68,Default,,0000,0000,0000,,the quantity such that \Nquantity demanded
Dialogue: 0,0:01:36.68,0:01:38.34,Default,,0000,0000,0000,,is equal to quantity supply
Dialogue: 0,0:01:38.34,0:01:41.74,Default,,0000,0000,0000,,by this quantity \Nis the equilibrium quantity.
Dialogue: 0,0:01:41.74,0:01:44.14,Default,,0000,0000,0000,,Namely, choose any other quantity \N
Dialogue: 0,0:01:44.14,0:01:47.12,Default,,0000,0000,0000,,and let's show that \Nthat can't be an equilibrium.
Dialogue: 0,0:01:47.12,0:01:49.98,Default,,0000,0000,0000,,So suppose that the quantity \Nbought and sold
Dialogue: 0,0:01:49.98,0:01:52.44,Default,,0000,0000,0000,,was 50 million barrels \Nof oil per day.
Dialogue: 0,0:01:52.44,0:01:55.13,Default,,0000,0000,0000,,Notice that for this last barrel of oil
Dialogue: 0,0:01:55.13,0:01:57.04,Default,,0000,0000,0000,,which is being bought and sold,
Dialogue: 0,0:01:57.04,0:02:02.96,Default,,0000,0000,0000,,buyers are willing to pay up to $90\Nfor that barrel of oil
Dialogue: 0,0:02:02.96,0:02:07.49,Default,,0000,0000,0000,,where for one more barrel of oil \Nthey're willing to pay $90.
Dialogue: 0,0:02:07.49,0:02:10.71,Default,,0000,0000,0000,,On the other hand, \Nsellers are willing to sell
Dialogue: 0,0:02:10.71,0:02:15.65,Default,,0000,0000,0000,,that barrel of oil or one more \Nbarrel of oil for just $50.
Dialogue: 0,0:02:15.65,0:02:20.04,Default,,0000,0000,0000,,So there's a big potential gain\Nfrom trade here of $40.
Dialogue: 0,0:02:20.04,0:02:24.80,Default,,0000,0000,0000,,Indeed, for any quantity below \Nthe equilibrium quantity
Dialogue: 0,0:02:24.80,0:02:27.86,Default,,0000,0000,0000,,there are unexploited gains \Nfrom trade.
Dialogue: 0,0:02:27.86,0:02:30.79,Default,,0000,0000,0000,,Now in economics we assume that \Nif you put a potential gain
Dialogue: 0,0:02:30.79,0:02:33.99,Default,,0000,0000,0000,,from trade in front of people, \Nthey're going to find it.
Dialogue: 0,0:02:33.99,0:02:36.82,Default,,0000,0000,0000,,They're going to be able to realize
Dialogue: 0,0:02:36.82,0:02:40.23,Default,,0000,0000,0000,,that if only they bought and sold \Na little bit more,
Dialogue: 0,0:02:40.23,0:02:43.01,Default,,0000,0000,0000,,both the buyers and the sellers \Ncould be better off.
Dialogue: 0,0:02:43.01,0:02:47.43,Default,,0000,0000,0000,,So that's why we assume that \Nthe quantity bought and sold
Dialogue: 0,0:02:47.43,0:02:50.85,Default,,0000,0000,0000,,will be pushed \Nto the equilibrium quantity
Dialogue: 0,0:02:50.85,0:02:53.64,Default,,0000,0000,0000,,because it's only \Nat the equilibrium quantity
Dialogue: 0,0:02:53.64,0:02:57.65,Default,,0000,0000,0000,,that all the gains from trade \Nhave been exploited.
Dialogue: 0,0:02:58.22,0:03:00.79,Default,,0000,0000,0000,,In a free market, could the quantity \Nbought and sold
Dialogue: 0,0:03:00.79,0:03:03.40,Default,,0000,0000,0000,,be greater than \Nthe equilibrium quantity?
Dialogue: 0,0:03:03.78,0:03:06.19,Default,,0000,0000,0000,,Well not for any significant \Nperiod of time.
Dialogue: 0,0:03:06.19,0:03:09.23,Default,,0000,0000,0000,,Imagine for example that \N90 million barrels of oil
Dialogue: 0,0:03:09.23,0:03:10.73,Default,,0000,0000,0000,,were being bought and sold.
Dialogue: 0,0:03:10.73,0:03:15.40,Default,,0000,0000,0000,,Well, for this last barrel of oil \Nthe suppliers are willing to sell
Dialogue: 0,0:03:15.40,0:03:19.01,Default,,0000,0000,0000,,that barrel of oil for $90, \Nthat's their cost.
Dialogue: 0,0:03:19.01,0:03:20.88,Default,,0000,0000,0000,,They require at least $90
Dialogue: 0,0:03:20.88,0:03:23.75,Default,,0000,0000,0000,,to stay in business \Nand sell that barrel of oil.
Dialogue: 0,0:03:23.75,0:03:26.08,Default,,0000,0000,0000,,On the other hand, buyers are\Nwilling to pay
Dialogue: 0,0:03:26.08,0:03:29.08,Default,,0000,0000,0000,,for that barrel of oil only $50.
Dialogue: 0,0:03:29.08,0:03:32.33,Default,,0000,0000,0000,,So there's a lot of waste going on here.
Dialogue: 0,0:03:32.33,0:03:35.99,Default,,0000,0000,0000,,Suppliers are spending more \Nto produce the barrel
Dialogue: 0,0:03:35.99,0:03:38.25,Default,,0000,0000,0000,,than the barrel is worth to buyers.
Dialogue: 0,0:03:38.25,0:03:41.89,Default,,0000,0000,0000,,Indeed at any quantity above \Nthe equilibrium quantity
Dialogue: 0,0:03:41.89,0:03:43.78,Default,,0000,0000,0000,,there is waste.
Dialogue: 0,0:03:43.78,0:03:45.37,Default,,0000,0000,0000,,And we don't expect waste
Dialogue: 0,0:03:45.37,0:03:48.46,Default,,0000,0000,0000,,to last very long \Nin this market precisely
Dialogue: 0,0:03:48.46,0:03:54.59,Default,,0000,0000,0000,,because if without any intervention\Nsuppliers are not going to be able
Dialogue: 0,0:03:54.59,0:03:58.62,Default,,0000,0000,0000,,to sell a product to buyers \Nfor more than the buyers
Dialogue: 0,0:03:58.62,0:04:00.58,Default,,0000,0000,0000,,are willing to pay for that product,
Dialogue: 0,0:04:00.58,0:04:03.61,Default,,0000,0000,0000,,for more than the product \Nis worth to the buyers.
Dialogue: 0,0:04:03.61,0:04:04.84,Default,,0000,0000,0000,,So for this reason
Dialogue: 0,0:04:04.84,0:04:08.30,Default,,0000,0000,0000,,we don't expect waste \Nto last in a free market either.
Dialogue: 0,0:04:08.30,0:04:12.79,Default,,0000,0000,0000,,So a free market maximizes \Nthe gains from trade.
Dialogue: 0,0:04:12.79,0:04:15.30,Default,,0000,0000,0000,,Remember also that \Nthe gains from trade
Dialogue: 0,0:04:15.30,0:04:17.56,Default,,0000,0000,0000,,can be broken down into two parts,
Dialogue: 0,0:04:17.56,0:04:22.31,Default,,0000,0000,0000,,the consumer surplus \Nand of course the producer surplus.
Dialogue: 0,0:04:23.09,0:04:25.92,Default,,0000,0000,0000,,Couple of other points \Njust to finish this off.
Dialogue: 0,0:04:25.92,0:04:27.52,Default,,0000,0000,0000,,Notice that the equilibrium price
Dialogue: 0,0:04:27.52,0:04:30.42,Default,,0000,0000,0000,,splits the demand curve \Ninto two parts.
Dialogue: 0,0:04:30.42,0:04:35.17,Default,,0000,0000,0000,,The goods are bought by the buyers \Nwho value them the most,
Dialogue: 0,0:04:35.17,0:04:37.46,Default,,0000,0000,0000,,the buyers with \Nthe highest demands.
Dialogue: 0,0:04:37.46,0:04:40.88,Default,,0000,0000,0000,,These are therefore the buyers \Nand these are the non-buyers
Dialogue: 0,0:04:40.88,0:04:43.98,Default,,0000,0000,0000,,and goods are sold by the sellers \Nwith the lowest costs.
Dialogue: 0,0:04:43.98,0:04:45.82,Default,,0000,0000,0000,,So these are the sellers
Dialogue: 0,0:04:45.82,0:04:49.30,Default,,0000,0000,0000,,and these with the higher cost \Nare the non-sellers.
Dialogue: 0,0:04:49.30,0:04:52.39,Default,,0000,0000,0000,,Okay, let's summarize this whole thing.
Dialogue: 0,0:04:52.39,0:04:54.86,Default,,0000,0000,0000,,Free market maximizes \Nthe gains from trade
Dialogue: 0,0:04:54.86,0:04:56.69,Default,,0000,0000,0000,,or the gain from trade \Nare maximized
Dialogue: 0,0:04:56.69,0:04:58.88,Default,,0000,0000,0000,,at the equilibrium \Nprice and quantity.
Dialogue: 0,0:04:58.88,0:05:02.00,Default,,0000,0000,0000,,And what this means is that \Nthe supply of goods is bought
Dialogue: 0,0:05:02.00,0:05:04.76,Default,,0000,0000,0000,,by the buyers with \Nthe highest willingness to pay.
Dialogue: 0,0:05:04.76,0:05:10.34,Default,,0000,0000,0000,,The supply of goods are sold by \Nthe suppliers with the lowest costs.
Dialogue: 0,0:05:10.34,0:05:11.99,Default,,0000,0000,0000,,And between the buyers \Nand the sellers,
Dialogue: 0,0:05:11.99,0:05:16.71,Default,,0000,0000,0000,,there are no unexploited gains \Nfrom trade and no wasteful trades.
Dialogue: 0,0:05:16.71,0:05:20.37,Default,,0000,0000,0000,,Okay, that concludes our review \Non to some new material.
Dialogue: 0,0:05:22.20,0:05:23.47,Default,,0000,0000,0000,,- [Announcer] If you want \Nto test yourself,
Dialogue: 0,0:05:23.47,0:05:25.59,Default,,0000,0000,0000,,click Practice Questions
Dialogue: 0,0:05:25.79,0:05:28.82,Default,,0000,0000,0000,,or if you're ready to move on, \Njust click "Next Video."
Dialogue: 0,0:05:28.82,0:05:31.45,Default,,0000,0000,0000,,♪ [music] ♪