Hi folks, let's finish up chapter three, 
so this will be chapter three, part three,
and we're going to talk about
equilibrium
and how to model shifts of supply and
demand and the influence they'll have on
equilibrium... and then we'll also talk
about what happens when we allow
multiple curves to move around at the
same time.  Okay so let's start with
equilibrium... and equilibrium quite simply
is where quantity supplied is going to
be equal to quantity demanded at a
specific price.  This is where the supply
and demand curves intersect, so we're
going to describe this as Qs is equal
to Qd at the equilibrium price.  So when
we plug this equilibrium price into our
two functions, supply and demand, it gives the same value.  We're going to see
that the quantity is equal, which is nice
because it means we don't have a 
shortage or a surplus.  In essence we are
producing the right amount of output
that people want to consume.  This will
also sometimes be referred to as a
market clearing price, this Peq here...
because of course at this price all that
is created is sold.  Okay so we understand
why equilibrium is attractive, but we
haven't quite pinned down why it's
likely to occur,  and I think the easiest
way to understand this is to start
thinking about prices that are not
equilibrium prices.  And what we're going
to see is that if a price is actually
too low...
when we plug it into our supply curve
we're going to be able to find out the
quantity supplied, amount that folks are
willing and able to supply at that price.  And
and we're going to plug into the demand
curve and find out the quantity demanded
at that price. 
What's obvious here is that QD is bigger
than Qs, and this of course implies that
there is excess demand, or a shortage, If
you think about this if we're
consistently wanting to buy more than is
currently being produced anyone who
wants those goods is going to be forced
to start bidding the price up for those
goods.  They're going to start offering to
pay more for them.  Certain people out
there will think that it is worth more
than what's actually being charged and
you will see the price starts to be
driven up.  Once we drive the price far
enough up we are of course gathering in more
and more quantity supplied and we're
losing more and more customers because
they don't think that it's worth it any
longer.  We're essentially rationing who
gets what,  so we're going to fix
shortages by raising prices.  When I say
we I really mean the market.  It's a
reflection of how we are competing for
things.  Surpluses are essentially going
to be the exact opposite. If you start
out with a price that is higher than
equilibrium we're going to be able to
plug it in to the demand function and
find out that the quantity demanded is
much smaller than the quantity supplied
suggested by the supply function.  We're
going to be able to describe this as
excess supply or surplus, and of course
when we are consistently producing more
than what folks are willing to buy at
that price, things go unsold.... and you're going to see
that there is pressure for firms to
start lowering prices in order to get
things to sell... and as they start to
lower those prices consumers start to
find this more and more attractive. Eventually once the price falls low
enough we're going to be able to get to
equilibrium.... and an equilibrium in both
of these cases.   We then end up with a
 Q that is both a Qs and a Qd
simultaneously, because it's at the
intersection.  The overarching point to
take away from this slide is that there
are natural dynamics that drive us
towards equilibrium prices and in the
process of doing that we are really
rationing who gets what.  That's easy to
see on the shortage side okay, but even
over here on the surplus side we're
essentially moving goods and resources
out of whatever industry this is as
people bail out right those are going to
then be put into some other market where
they will command a better price right.
Presumably if people are leaving this
industry they are going somewhere else.
Okay
so we understand about equilibriums now
and why we are going to tend towards
them.  Equilibrium itself means no
tendency to change or balance, but we
know that prices and quantities do
change... so how do we explain that with
this model.  The explanation is going to
involve a discussion of shifts and how
they disturb equilibrium, but then the
market essentially moves towards a new
equilibrium. Let's make this market here
on the left a market for saddles... and
let's say that there has been an
increase in the price of leather, which
is a primary input for creating saddles.
This is going to lead to a leftward shift of the supply curve,  and you can
see right away that our intersections of
supply and demand have changed.
This of course implies that the equilibrium price is going to have to rise and the
equilibrium quantity is going to fall. 
Let's spend just a little more time
talking about why that happens.  At the
original price consumers still want to
purchase the same amount of saddles. 
Firms on the other hand are not
interested in supplying as many at that
price,  so what you have is a little
shortage. We know that shortages get
fixed by markets when prices rise.. as the
price rises we end up now at a new
equilibrium price and a new equilibrium
quantity.  So there's a supply shift and
the market settling things out again at
a new equilibrium.  Let's talk about a
demand shift and let's say that we've
got a market for sweaters here on theright... and let's say that income has
fallen for consumers.  If sweaters are a
normal good, then we would expect that
there is now a fall in demand for
sweaters... so we're going to need to move
the demand curve over here to the left, 
indicating a decrease... and what this
means is that at our current price
consumers want to buy far less sweaters
than the amount of sweaters that firms
would be willing and able to supply at
that price.  In essence this is a surplus,
or excess supply.  Surpluses are fixed in
markets by prices falling and of course
once the price falls far enough we're
going to get ourselves over here to our
new equilibrium price and this will of
course also be our new equilibrium Quantity.
That quantity is less than the old
equilibrium and we have a new price
that's also less, right?? so the results of
this is a fall in P and a fall in
quantity at the new equilibrium.
Let's move next to simultaneous shifts. 
hopefully the single shifts on the last
slide were relatively straightforward.  In
the real world we're often faced with
shifts of both the supply and the demand
curve happening at the same time.  I want
to show you how to use this model to
actually think your way through a
scenario like this, even when you don't
know for sure which of the two shifts is
larger.  Let's take an example of internet
security services, so that would be the
quantity that we're talking about here...
and let's say that one there is an
increase in tastes or preferences for
internet security services, more people
are wanting them, and two let's say that
there is an increase in the number of
firms.
We know that the increase in the tastes
is going to lead to a rightward shift in
the demand curve, and the rightward shift
in the demand curve is going to be
graphed as such.  Down here the number of
firms increasing is going to lead to a
rightward shift in the supply curve, and
you would graph it as such.
Now you've got two new curves and it
looks as though you have got a new
intersection here, and if you were to
compare it to your old intersection you
could see that this new intersection
seems to indicate that you have an
increase in price and it also seems to
indicate that you are going to have an
increase in quantity.  Now one of those is
actually going to be a sure thing.  The
other is actually just an accident of
the way that we've drawn the graph,
because keep in mind when I was shifting
supply and demand around here, I'm just
drawing in lines.   I don't really have any
data. I just have a loose piece of
information that taste is increased so
demand shifts right and number of firms
have increased so supply shifts right...
but we actually would need to know the
magnitudes of these shifts to get
precise.  Now the good news is this
doesn't leave us dead in the water.  You
can actually start to take each of these
shifts separately,  and you can start to
look at what each of them would produce
if they were separate.   So in the case of an
increase in demand... it's going to lead to a
higher price and it would lead to a
higher quantity... and you can look at that..uh...
by looking here.  That's where we would be
on the original supply curve with just
the increase in demand. 
You can see that obviously P and Q were.
higher there.  With the supply curve we're
going to be able to see that you would
have been at S1 and D here.  This is going
to indicate to that you would have a
lower price and a higher quantity.... that's
if supply by itself we're changing.   Now
we know for a fact that both of them
have changed, so what do we know for sure
about P and Q. What I want you to
recognize about P and Q is that you have
quantity increasing for both of those.
You know Q is going up.  What is really
problematic for you is P is going up in
one case and down in the other.  P is
going to be indeterminate.  The only way
you'll be able to tell what happens with
P is if you know if the supply or the
demand is the bigger shift.  If the demand
was the bigger shift-- prices are rising
if supply is the bigger shift-- prices
would be falling.  Q we know for sure
though is going up.  Now in the modern
market what we actually see is that the
prices are skyrocketing in Internet
security services.  It's implying that our
tastes and the demand is growing faster
right now than the supply can keep up. 
Hopefully this helps you think about
some simultaneous shifts.
