So we've done a lot of groundwork thinking about the goal of figuring out where do prices come from. Prices in the market come from the interaction of buyers and sellers. And so we drew the, Depiction of of how buyers behave with the demand curve, and we also drew a depiction of how the sellers behave with the supply curve, and now we want to put this together, okay. And so what we're going to do here in this video, Is we're going to think about finding equilibrium. Equilibrium is really key to us, okay. Because, equilibrium means something very special equilibrium means just these four words, no tendency for change, that's what equilibrium means for us. If you think about equilibrium back from the days when you maybe take a physics class. That the professor probably would introduce like something like a say a cereal bowl, and in the bottom of a cereal bowl there'll be a little ball bearing. And that ball bearing would be at rest, that's an equilibrium. And if something comes along and bumps that cereal bowl, what happens that ball bearing starts rolling all over the place. And eventually it comes to rest again at a new equilibrium, okay. Now that's in a nutshell, that's what equilibrium is all about for us, that's really important. First of all, the concept of equilibrium means that a market finds itself at a place where headers don't tendency to change. That means buyers are satisfied with where they are, sellers are satisfied with where they are, the government is satisfied where it is. We have an interest the government yet, but we're going to have to bring the government in when the government comes in, they're also going to have to be an equilibrium. Otherwise, they're going to make changes if the government wants to make changes, that means we're in an out of equilibrium situation, okay? But for our point of view, we're going to find an original equilibrium and then we're going to do the interesting stuff in this course. Which is think about how that equilibrium moves from one point to another point. In other words, if we can find an equilibrium market and then introduce some external event, a hurricane comes through, okay. The hurricane is going to put all sorts of markets out of equilibrium, and those markets are going to have to struggle to get back into a new state or there's no tendency to change. During that time, moving from one equilibrium to another you going it's very chaotic, okay. But there will be systematic steps that suppliers and consumers will do moving from point A to point B, and that's what we want to learn. Because the bottom line is, back in the in the orientation video for this course here that we're doing, I talked to you about my goal is I want you to, you read a newspaper story. The newspaper story is written by somebody whose title is a reporter, the reporter writes the story and tells you about the data what happened. This hurricane came through and as a result blah, blah, blah, I want you to be able to analyze that. Analysts know not just that it happened, but they know the whys, they understand the movement from the original equilibrium bumped the ball. The ball bearing is going to roll around and they'll come back to a new equilibrium. In our case, we have original equilibrium with supply and demand something shocks one of them, and we have to move to a new equilibrium. In this case, in this lecture we're going to think about how to find an equilibrium. So we'll start very straightforward, I'm going to put on this graph on this axis system. I'll draw my axes, I got price and I got quantity, price on the vertical axis quantity on the horizontal axis. And I'm going to draw an original demand curve which looks like this, and an original supply curve which looks like this. And I'll label this as S0 and D0 for the original demand and the original supply, and now we're thinking about equilibrium, okay. Where is the equilibrium in this market? Well, many of you've already had an economics course that even those of you who don't have an economics course. You're looking at this and you say, I'll bet you it's where those two intersect, and of course, that's really the answer. The equilibrium is the price where the two graphs meet we'll call this PE. At PE, Consumers want to purchase QE, we'll read that off the demand curve. The demand curve tells us that for different possible prices consumers want to buy this amount. If price goes down consumers are going to want to increase the quantity demanded. If price goes up consumers are going to cut back on quantity demanded, and also for various prices if price goes up suppliers will put more of the market. If price goes down suppliers will put less in the market, at this particular point, it's a magic point at this particular point, okay, which we'll call E. At this point E the amount consumers wish to purchase is exactly equal to the amount farms actually want to sell, okay, so that's what we call the equilibrium price. Now it's important for us to prove this to each other, okay, it's important for us to prove this and, I took a lot of math courses in my life. And many of you have too, and it was never one of my favorite things when the instructor would say, today we're going to prove XYZ. because proofs require a lot of accuracy and technical details of stuff, but my favorite types of proof was something called a proof by contradiction. Proof by contradiction says, well assume the assume something else and show why that can't be. So we're going to do a proof by contradiction, okay, get my pin back, and I'm going to call this a proof, By contradiction. And a proof by contradiction says, so you're telling me PE is the equilibrium price. Well, suppose we actually tried P1? Well we had to show that P1 can't possibly be at equilibrium, okay, because the equilibrium means what? No, tendency for change, okay, so this price P1 consumers want to buy alpha, but firms want to sell beta? That's not even out of equilibrium situation, firms are putting too much of the market and people are not buying them, okay. Firms are going to wait a minute, wait a minute [LAUGH] we're making too many products, we're making too many products at this. And so what's going to happen is the price in this case will in fact go down, because as the price goes down consumers will want to buy more, that's good. They're sort of eating up some of that surplus and firms are going to supply less. And any possible price above PE, any price above PE will be an out of equilibrium situation, because firms are putting too much on a market compared to what consumers want. So we know price can't be above PE well, let's try the alternative, because that's what you have to do in a proof by contradiction. Try any arbitrary price lower than PE, at this lower price firms, want to sell you gamma, but consumers want to buy delta. So consumers want to buy a lot more than there is out there, okay, economists will call this situation, A shortage. And economists I should have put this up here earlier, this situation goes by the original name of surplus. A surplus is an out of equilibrium situation too much is being produced compared to what people want to buy that's not an equilibrium. Firms cannot exist by over making products that people are not buying they just rot on the shelves or they gather dust and it's just not a good situation. Likewise a shortages is an out of equilibrium situation, people want more of the product than what is available. They are going to clamor for it, and what's going to happen in that case? Well, they're going to bid up the prices as they bid up the prices, firms will say, okay. Well, if that price I can put more on the market consumers as they bit up the prices will say, I don't really need as much as I thought I did. That nice little price it look very attractive, but no, and so we're going to end up at back of that point. So that's a proof by contradiction, the proof by contradiction just says that any price above PE, okay, cannot support an equilibrium, any price below PE cannot support an equilibrium. So there's going to be a tendency for change, the ball bearing is still moving around. Let's do one example, let's just do one example, I'm going to draw another graph here. And I'm going to do it for a specific market, we'll put price on the vertical axis we'll put quantity here, and we're going to let's say this is quantity of orange juice, OJ, okay, quantity of OJ. And we've got a demand curve that looks like this, and we got a supply curve that looks like this. So we'll call this S0, and we'll call this D0 and we have an original equilibrium, which we'll call P0, And Q0 let me get good at zero, okay. Now something comes along, this is an equilibrium, right? There's no tendency for change at the price P0, firms want to sell exactly the amount that consumers want to buy, that's an equilibrium no tendency for change. Now suppose you wake up one morning and you turn on the television, and on the television news, they're showing orange groves in Florida with one inch thick ice on the oranges. These are freaks of whether that happen once every x years five, six years. Some remarkable cold streak will go down to low into the Florida and it'll land on these poor orange grows and they're ruined, okay. Now you know what happens when you see that? I know what I do and I see it I say, should have stopped and bought some orange juice yesterday, okay. Because today life has changed, what's happened here is that the supply curve is now way back, why? Well, the supply basically the majority of our orange juice in the United States comes from Florida, Texas and California. Well, we just lost Florida [LAUGH] one-third of the orange suppliers just got wiped out, okay. That means that what's left is just Texas and California, and so the way we think about what happens here, is that at the old price at P0. Consumers want to buy how much? Well, you read that off of the demand curve, consumer still want to buy this amount of orange juice, but how much orange juice is actually being put in the market? Well only this amount, okay given this price new surprises, this is all going to give you folks. Well, that's a shortage right? It's not an equilibrium situation more people want the product, Than what firms are willing to supply, what's going to happen to the price? Well, you know price is going to get bit up, as price gets bit up, these suppliers will say well, you know what I can give you more after all. I can divert some of my oranges that I was going to use is just orange juice for whole oranges for sale. I'm going to crush them and make more orange juice because orange juice is getting more lucrative than just putting whole oranges on the market. At the same time as price goes up, some of these consumers are exiting the market, some of these people say, man at this price, I can't have one of juice for breakfast. I'm going back to Diet Coke, all right, we're going to shift this back here and we're going to end up in a situation a new equilibrium. We're given the remaining suppliers, this is the new price and this, Is the new quantity. You are analysts and you know that, as soon as you see on the news that there's one inch thick ice on the Orange Groves in Florida in your head, you know, man. That supply curve orange juice just took a big shut, there was a shift back in the supply curve orange juice because these guys crops are ruined. And you could as an analyst then make a prediction that price is going to go up, you don't know for sure how much. Because right now you've got kind of just this this generalized first know what these curves are. But if you were for example part of a produce expert working for a big financial house, you would know a lot more about what the size of these curves are like what their slopes are. And you would have a pretty good prediction by the time you got to the office to know what's actually going to happen to price of orange juice is going to go up by 37.2%. Given my understanding of what the demand curve looks like and what the supply curve looks like, because I've been working with real data on a daily basis, thanks.
