The Equilibrium Price
-
0:01 - 0:03♪ [music] ♪
-
0:12 - 0:14- [Narrator] We know
from previous lessons -
0:14 - 0:16that the demand curve
and the supply curve show -
0:16 - 0:20how buyers and sellers
respectively respond to changes -
0:20 - 0:21in the price of a good.
-
0:21 - 0:24In this lesson, we'll show you
how the interactions -
0:24 - 0:26of buyers and sellers
determine the price. -
0:27 - 0:28Let's start with the punch line.
-
0:28 - 0:31The equilibrium price is the price
where the quantity demanded -
0:31 - 0:34is equal to the quantity supplied,
-
0:34 - 0:38right here, and this is
the equilibrium quantity. -
0:38 - 0:40Why is this the equilibrium price?
-
0:40 - 0:43At any other price, forces are put
into play that will push -
0:43 - 0:46the price towards
the equilibrium price. -
0:46 - 0:49It's kind of like a ball in a bowl,
where the ball always -
0:49 - 0:51returns to one stable position.
-
0:51 - 0:53The equilibrium price is
the only place -
0:53 - 0:55where the price is stable.
-
0:55 - 0:58To see why, the first thing
to understand is -
0:58 - 1:00that buyers don't
compete against sellers. -
1:01 - 1:03Buyers compete
against other buyers. -
1:03 - 1:07A buyer obtains goods by bidding
higher than other buyers. -
1:08 - 1:10And sellers compete
against other sellers -
1:10 - 1:12by offering
to sell at lower prices. -
1:12 - 1:15Think about it -- at an auction,
the buyer with the highest bid -
1:15 - 1:19gets the item, and the seller with
the lowest price makes the sale. -
1:21 - 1:24So let's say the price of oil is
currently 50 bucks a barrel -- -
1:24 - 1:27that's above the equilibrium
price of $30 a barrel. -
1:27 - 1:32At $50, the quantity supplied is
more than the quantity demanded -
1:32 - 1:36so we say there is a surplus.
So what happens? -
1:36 - 1:38It's sale time!
[party noisemakers] -
1:38 - 1:40When there's a surplus,
sellers can't sell as much -
1:40 - 1:42as they would like to
at the going price -
1:42 - 1:45so sellers have an incentive
to lower their price a little bit -
1:45 - 1:48so they could outcompete
other sellers and sell more. -
1:48 - 1:51The price will continue to fall
until the quantity demanded is -
1:51 - 1:54equal to the quantity supplied,
and equilibrium is reached. -
1:55 - 1:58Now let's say the price is less
than the equilibrium price, -
1:58 - 2:00say 15 bucks a barrel.
-
2:00 - 2:03At 15 bucks a barrel,
the quantity demanded exceeds -
2:03 - 2:06the quantity supplied, a shortage.
-
2:06 - 2:07And what happens now?
-
2:07 - 2:09When there's a shortage,
buyers can't get as much -
2:09 - 2:12of the good as they want
at the going price so they compete -
2:12 - 2:14to buy more
by bidding up the price. -
2:14 - 2:16Now since buyers are easy to find,
-
2:16 - 2:19sellers also have an incentive
to raise the price. -
2:20 - 2:23The price will continue to rise
until quantity demanded is equal -
2:23 - 2:26to the quantity supplied
and equilibrium is reached. -
2:26 - 2:29At any price other
than the equilibrium price, -
2:29 - 2:32the incentives of the buyers
and sellers push the price -
2:32 - 2:34towards the equilibrium price.
-
2:34 - 2:36Only the equilibrium
price is stable. -
2:37 - 2:39Now let's take a deeper look
at the market equilibrium -
2:39 - 2:41and some of its properties.
-
2:41 - 2:44Remember that there are
many different users of oil -
2:44 - 2:45and many different uses for oil,
-
2:45 - 2:48each with substitutes,
alternatives, and values. -
2:48 - 2:51At any specific price of oil,
there's a group of buyers -
2:51 - 2:55who value oil enough
to demand it at that price. -
2:56 - 2:59And as the price changes,
so do the buyers and their uses. -
2:59 - 3:03On the supply side, at each price
on the supply curve, we're looking -
3:03 - 3:06at a group of suppliers whose cost
of extraction is low enough -
3:06 - 3:09to be profitable at that price.
-
3:09 - 3:14At the equilibrium price, these
higher value groups are the buyers, -
3:14 - 3:17and these lower value groups
are the non-buyers. -
3:17 - 3:18[toy squeak]
-
3:19 - 3:21Also notice that every seller has
-
3:21 - 3:24lower cost than any
of the non-sellers. -
3:28 - 3:31Since the buyers
with the highest values buy, -
3:31 - 3:33and the sellers
with the lowest cost sell, -
3:33 - 3:36the gain from trade --
the difference between -
3:36 - 3:40the value a good creates
and its cost -- is maximized. -
3:40 - 3:43In addition, at the equilibrium
quantity, every trade that can -
3:43 - 3:47generate value does generate value
up until the very last trade -
3:47 - 3:51where the value to buyers is
just equal to the cost to sellers. -
3:51 - 3:52- [low voice] Yeah!
-
3:52 - 3:53- [Narrator] In a free market,
-
3:53 - 3:55there are no unexploited
gains from trade, -
3:55 - 3:58and there are no wasteful trades.
-
3:58 - 4:00If the quantity exchanged
were greater than -
4:00 - 4:01the equilibrium quantity,
for example, -
4:01 - 4:04we would be drilling
deep and expensive oil wells -
4:04 - 4:07just to produce more rubber duckies,
and that would be wasteful. -
4:07 - 4:09- [whiny voice] Oh no!
-
4:09 - 4:11- [Narrator] In a free market,
buyers and sellers acting -
4:11 - 4:14in their own self interest
end up at a price and quantity -
4:14 - 4:18that allocates oil
to the highest value buyers -
4:18 - 4:22produced by the lowest cost sellers
in a way that maximizes -
4:22 - 4:26the gains from trade -- the sum of
the benefits to buyers and sellers. -
4:26 - 4:27[crowd cheering]
-
4:27 - 4:29This is one of the reasons
Adam Smith said that -
4:29 - 4:32the market process works
like an invisible hand -
4:32 - 4:34to promote the social good.
-
4:36 - 4:39- [Narrator] If you want to test
yourself, click "Practice Questions." -
4:39 - 4:43Or, if you're ready to move on,
just click "Next Video." -
4:44 - 4:45♪ [music] ♪
- Title:
- The Equilibrium Price
- Description:
-
{'type': u'plain'}
- Video Language:
- English
- Team:
- Marginal Revolution University
- Project:
- Micro
- Duration:
- 04:51
Kirstin Cosper edited English subtitles for The Equilibrium Price | ||
Kirstin Cosper edited English subtitles for The Equilibrium Price | ||
Kirstin Cosper edited English subtitles for The Equilibrium Price | ||
Kirstin Cosper edited English subtitles for The Equilibrium Price | ||
MRUniversity edited English subtitles for The Equilibrium Price |