The Equilibrium Price
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0:00 - 0:08♪ [music] ♪
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0:08 - 0:14- [Narrator] We know
from previous lessons -
0:14 - 0:17that the demand curve
and the supply curve show -
0:17 - 0:19how buyers and sellers
respectively respond to changes -
0:19 - 0:22in the price of a good.
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0:22 - 0:23In this lesson, we'll show you
how the interactions -
0:23 - 0:25of buyers and sellers
determine the price. -
0:25 - 0:27Let's start with the punch line.
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0:27 - 0:30The equilibrium price is the price
where the quantity demanded -
0:30 - 0:35is equal to the quantity supplied,
-
0:36 - 0:41right here and this is
the equilibrium quantity. -
0:41 - 0:42Why is this the equilibrium price?
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0:42 - 0:43At any other price, forces are put
into play that will push -
0:43 - 0:45the price towards
the equilibrium price. -
0:45 - 0:47It's kind of like a ball in a bowl,
where the ball always -
0:47 - 0:50returns to one stable position.
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0:50 - 0:52The equilibrium price is
the only place -
0:52 - 0:55where the price is stable.
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0:55 - 0:57To see why, the first thing
to understand is -
0:57 - 1:00that buyers don't
compete against sellers. -
1:00 - 1:03Buyers compete
against other buyers. -
1:03 - 1:06A buyer obtains goods by bidding
higher than other buyers. -
1:06 - 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 - 1:22gets the item, and the seller with
the lowest price makes the sale. -
1:22 - 1:23So let's say the price of oil is
currently $50 a barrel -- -
1:23 - 1:26that's above the equilibrium
price of $30 a barrel. -
1:26 - 1:31At $50, the quantity supplied is
more than the quality demanded. -
1:31 - 1:35So we say there is a surplus,
so what happens? -
1:35 - 1:36It's sale time!
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1:36 - 1:38When there's a surplus,
sellers can't sell as much -
1:38 - 1:42as they would like to
at the going price -
1:42 - 1:46so sellers have an incentive
to lower their price a little bit -
1:46 - 1:47so they could outcompete
other sellers and sell more. -
1:47 - 1:50The price will continue to fall
until the quantity demanded is -
1:50 - 1:55equal to the quantity supplied
and equilibrium is reached. -
1:55 - 1:57Now let's say the price is less
than the equilibrium price, -
1:57 - 2:00say $15 a barrel.
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2:00 - 2:03At $15 a barrel,
the quantity demanded exceeds -
2:03 - 2:06the quantity supplied, a shortage.
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2:06 - 2:07And what happens now?
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2:07 - 2:10When there's a shortage,
buyers can't get as much -
2:10 - 2:11of the good as they want
at the going price so they compete -
2:11 - 2:14to buy more
by bidding up the price. -
2:14 - 2:18Now since buyers are easy to find,
-
2:19 - 2:20sellers also have an incentive
to raise the price. -
2:20 - 2:23The price will continue to rise
until quantity demanded is equal -
2:23 - 2:25to the quantity supplied
and equilibrium is reached. -
2:25 - 2:28At any price other
than the equilibrium price, -
2:28 - 2:32the incentives of the buyers
and sellers push the price -
2:33 - 2:35towards the equilibrium price.
-
2:35 - 2:38Only the equilibrium
price is stable. -
2:38 - 2:39Now let's take a deeper look
at the market equilibrium -
2:39 - 2:41and some of its properties.
-
2:41 - 2:42Remember that there are
many different users of oil -
2:42 - 2:45and many different uses for oil,
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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 - 2:56who value oil enough
to demand it at that price. -
2:56 - 3:01And as the price changes,
so do the buyers and their users. -
3:01 - 3:02On the supply side at each price
on the supply curve, we're looking -
3:02 - 3:05at a group of suppliers who's cost
of extraction is low enough -
3:05 - 3:11to be profitable at that price.
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3:12 - 3:13At the equilibrium price, these
higher value groups are the buyers, -
3:13 - 3:16and these lower value groups
are the non-buyers. -
3:16 - 3:20Also notice that every seller has
-
3:20 - 3:24lower cost than any
of the non-sellers. -
3:24 - 3:29Since the buyers
with the highest values buy, -
3:29 - 3:32and the sellers
with the lowest cost sell, -
3:32 - 3:37the gain from trade --
the difference between -
3:37 - 3:39the value a good creates
and its cost -- is maximized. -
3:39 - 3:42In addition, at the equilibrium
quantity, every trade that can -
3:42 - 3:46generate value does generate value
up until the very last trade -
3:47 - 3:53where the value to buyers is
just equal to the cost to sellers. -
3:53 - 3:57In a free market, there are
no unexploited gains from trade, -
3:57 - 3:58and there are no wasteful trades.
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3:58 - 4:01If the quantity exchanged were
greater than equilibrium quantity, -
4:01 - 4:05for example, we would be drilling
deep and expensive oil wells -
4:05 - 4:06just to produce more rubber duckies
and that would be wasteful. -
4:06 - 4:08- [whiny voice] Oh no!
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4:08 - 4:09- [Narrator] In a free market,
buyers and sellers acting -
4:09 - 4:11in their own self interest
end up at a price and quantity -
4:11 - 4:16that allocates oil
to the highest value buyers -
4:16 - 4:21produced by the lowest cost sellers
in a way that maximizes -
4:21 - 4:24the gains from trade -- the sum of
the benefits to buyers and sellers. -
4:24 - 4:27[crowd cheering]
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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.
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4:35 - 4:40If you want to test yourself,
click "Practice Questions." -
4:40 - 4:43Or, if you're ready to move on,
just click "Next Video." -
Not Synced♪ [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 |