Lesson 2: Module 1 - The Law of Demand, Income-Substitution Effects, and Demand Curve Shift Factors

9
Lesson 2 00:00:52,100 --> 00:00:58,250

In addition, in this lesson we will do our own
version of economic gymnastics
Module 1 - The Law of Demand,
Income-Substitution Effects, and 10
00:00:58,250 --> 00:01:07,070
Demand Curve Shift Factors as I introduce to important concepts like
1 shifts in the demand and supply curves that
00:00:13,280 --> 00:00:16,540 reflect changing market conditions.
Hi, Professor Navarro here and in this our second
lesson, 11
00:01:07,570 --> 00:01:09,850
2 And here is your first Key Point:
00:00:16,540 --> 00:00:21,440
we are going to drill down into two keywords that 12
you have heard often in your life: 00:01:09,850 --> 00:01:14,080
The anticipation of and reaction to,
3
00:00:21,850 --> 00:00:23,740 13
supply and demand. 00:01:14,080 --> 00:01:20,880
market shifts in the demand and supply curves
4 is one of the most important elements of business
00:00:23,970 --> 00:00:33,230 strategy.
In particular I will show you how the forces of
supply and demand 14
lead to an equilibrium in the market and thereby 00:01:21,400 --> 00:01:27,510
set market prices. And I will illustrate that key point in this lesson
with lots of useful examples.
5
00:00:33,740 --> 00:00:36,030 15
As part of this demonstration, 00:01:27,510 --> 00:01:32,350
At any rate, that’s our “tell them what you are
6 going to tell them” overview.
00:00:36,030 --> 00:00:41,910
I will show you that the market price typically 16
reaches its competitive equilibrium 00:01:32,350 --> 00:01:37,230
So let’s now dig deep into the mysteries of supply
7 and demand.
00:00:41,910 --> 00:00:46,760
at precisely the point where the demand and 17
supply curves cross. 00:01:41,760 --> 00:01:47,910
The 19th century Scottish philosopher and satirist
8 Thomas Carlyle once said:
00:00:47,050 --> 00:00:51,110
That's where the forces of demand and supply are 18
just in balance. 00:01:47,910 --> 00:01:53,620
© Peter Navarro MICROECONOMICS

Unauthorized use of, dissemination, and/or duplication of this material is strictly prohibited.
“Teach a parrot the words s'upply and demand,'
and you’ve got an economist.” 28
00:02:50,140 --> 00:02:53,850
19 Fourth: The supply curve will always slope upward.
00:01:53,620 --> 00:01:56,940
Of course economics is hardly that simple, 29
00:02:54,250 --> 00:03:00,710
20 This reflects the equally intuitive idea that
00:01:56,940 --> 00:02:02,040 firms will offer more and more of the product or
but Carlyle's wry observation does hit on a basic service,
nerve in economics.
30
21 00:03:00,710 --> 00:03:05,050
00:02:02,830 --> 00:02:10,590 as the price offered in the marketplace rises.
To wit: the concept of supply and demand
rests at the core of any study of how the market 31
system works. 00:03:05,400 --> 00:03:14,650
Finally, the market equilibrium price and quantity
22 may typically be found where the supply and
00:02:11,680 --> 00:02:16,140 demand curves cross.
To begin our mastery of some of the basic
elements of supply and demand, 32
00:03:17,170 --> 00:03:19,400
23 Now, besides these basic ideas,
00:02:16,140 --> 00:02:21,450
let's start the five basic truisms about any supply 33
and demand figure: 00:03:19,400 --> 00:03:27,170
I want to alert you to some additional subtleties
24 about supply and demand curves
00:02:22,690 --> 00:02:29,650 that we will soon be exploring in more detail.
First, the price of the good or service in question
will always be labeled on the vertical axis. 34
00:03:27,280 --> 00:03:33,340
25 First, the slope of either the demand or supply
00:02:29,970 --> 00:02:35,580 curve can range from the flat to the steep.
Second, the quantity will always be labeled on the
horizontal axis. 35
00:03:34,030 --> 00:03:39,180
26 For example, this demand curve as draw has a
00:02:36,030 --> 00:02:40,480 relatively flat-slope.
Third: The demand curve will always slope
downward. 36
00:03:39,450 --> 00:03:42,250
27 This means that a small change in price
00:02:40,990 --> 00:02:49,400
This reflects the intuitive idea that the lower the 37
price of the product or service, 00:03:42,250 --> 00:03:46,200
the more consumers will demand. results in a large change in quantity demanded--

shift the supply curve of a manufacturing industry
38 dependent on oil.
00:03:46,200 --> 00:03:49,060 where much of the world’s global oil supply is,
and that’s called elastic demand.
48
39 00:04:42,250 --> 00:04:51,250
00:03:49,340 --> 00:03:53,740 can by raising the price of a key factor input,
Conversely, a steeply sloped demand curve like shift the supply curve of a manufacturing industry
this one dependent on oil.
40 49
00:03:53,740 --> 00:04:01,280 00:04:51,250 --> 00:04:54,870
is characterized by a large price change resulting And the shift will be inwards or to the left.
in a small change in quantity demanded.
50
41 00:04:55,110 --> 00:04:59,800
00:04:01,400 --> 00:04:10,250 In this case, price rises from P1 to P2,
Such inelastic demand is typical of the
markets for goods that people in the vernacular, 51
“just gotta have.” 00:04:59,800 --> 00:05:04,390
and quantity falls from Q1 to Q2.
42
00:04:10,920 --> 00:04:19,930 52
Think of insulin for the diabetic or gasoline for 00:05:04,600 --> 00:05:11,630
motorists in affluent societies like America or So the result of this energy price shock is a higher
Europe. price and lower quantity.
43 53
00:04:21,000 --> 00:04:24,250 00:05:11,910 --> 00:05:15,850
Now here’s an equally important subtlety: Conversely, the discovery of so-called fracking
technologies
44
00:04:24,540 --> 00:04:31,930 54
Both the demand and supply curves can actually 00:05:15,850 --> 00:05:22,410
shift as well – either inward, or outward. to recover shale gas and oil at low cost, may be
viewed as a positive energy shock.
45
00:04:32,880 --> 00:04:38,480 55
For example, a negative energy price shock due to 00:05:22,540 --> 00:05:27,400
say a war in the middle east In this case, the supply curve shifts outwards and
to the right;
46
00:04:38,480 --> 00:04:42,030 56
where much of the world’s global oil supply is, 00:05:27,400 --> 00:05:31,170
the price of oil falls from P1 to P2,
47
00:04:42,030 --> 00:04:42,250 57
can by raising the price of a key factor input, 00:05:31,170 --> 00:05:37,170

and quantity increases from Q1 to Q2. 68
00:06:32,080 --> 00:06:35,000
58 Did you label your axes correctly?
00:05:38,420 --> 00:05:41,800
Ok. That’s the big supply and demand picture. 69
00:06:35,340 --> 00:06:43,000
59 So, in this figure the consumer will buy 20 boxes
00:05:41,970 --> 00:05:48,930 of cornflakes at point E, if the price is 1.
Now, let’s do a little nuts and bolts work here, and
start by building a sample demand curve. 70
00:06:43,200 --> 00:06:49,400
60 But what about at a price of 4?
00:05:53,940 --> 00:05:59,360 Here, the consumer will buy only 10 boxes at point
In order to build a demand curve, B.
we have to have some data on price and quantity.
71
61 00:06:49,910 --> 00:06:54,410
00:05:59,680 --> 00:06:03,700 The obvious implication of this downward sloping
So after sending out our request to our marketing demand curve is this:
department...
72
62 00:06:54,650 --> 00:07:01,510
00:06:03,700 --> 00:06:06,880 The lower the price – ceteris paribus -- the more
perhaps we come up with a table like this. units the consumer will demand.
63 73
00:06:06,880 --> 00:06:09,970 00:07:01,510 --> 00:07:06,430
It provides a demand schedule for corn flakes. And the higher the price, – ceteris paribus –
64 74
00:06:10,370 --> 00:06:14,710 00:07:06,430 --> 00:07:08,770
So why don’t you PAUSE the presentation now and the less the consumer will demand.
take out a pencil and paper,
75
65 00:07:09,270 --> 00:07:16,770
00:06:14,710 --> 00:06:22,340 And by the way, the term “ceteris paribus” is a
or more likely a computer tablet and stylus, and Latin word for “holding other things constant.”
try drawing a demand curve from this data.
76
66 00:07:17,000 --> 00:07:24,020
00:06:22,340 --> 00:06:24,340 This is a very critical assumption that economists
Give it a PAUSE now. often make in supply and demand analysis.
67 77
00:06:28,600 --> 00:06:32,080 00:07:24,020 --> 00:07:25,340
Ok. Does your figure and demand curve look like Why?
this?
78

00:07:25,510 --> 00:07:31,630
Because “holding other things constant” allows us 87
to draw supply and demand diagrams 00:08:32,140 --> 00:08:35,400
That is quite literally the substitution effect.
79
00:07:31,630 --> 00:07:33,800 88
in two dimensional space. 00:08:35,630 --> 00:08:37,170
But check this out:
80
00:07:34,200 --> 00:07:37,850 89
I will come back to explain that idea more fully in a 00:08:37,170 --> 00:08:42,200
moment. When the price of beef rises, consumers will ALSO
have less purchasing power,
81
00:07:38,770 --> 00:07:45,340 90
For now, let’s just drill down on why consumers 00:08:42,200 --> 00:08:50,200
demand more of a product as its price falls. so that portion of the increase of consumer
purchases of chicken
82 due to the reduction in consumer purchasing
00:07:50,980 --> 00:07:56,520 power,
It is not just common sense that
consumers will demand more of a product as its 91
prices falls. 00:08:50,200 --> 00:08:52,200
is the income effect.
83
00:07:57,050 --> 00:08:04,830 92
It’s also a principle based on very careful scientific 00:08:52,430 --> 00:08:56,960
observation and what economists call the “Law of We'll talk more about the substitution and income
Demand.” effects in the next lesson.
84 93
00:08:05,110 --> 00:08:14,250 00:08:57,280 --> 00:09:05,230
In fact, there are two components to the Law of In the meantime, let’s cycle back to the
Demand – a “substitution effect” and an “income assumption of ceteris paribus
effect.” or holding other things constant.
85 94
00:08:14,710 --> 00:08:23,280 00:09:05,400 --> 00:09:08,300
Here is a useful way to think about the Law of In fact, this ceteris paribus assumption
Demand and
its two effects within the context of the price of 95
say, beef. 00:09:08,300 --> 00:09:13,520
allows us not just to draw supply and demand
86 diagrams in two-dimensional space.
00:08:23,680 --> 00:08:31,850
If for example, the price of beef rises, consumers 96
will tend to substitute other meats in their diet like 00:09:13,910 --> 00:09:22,470
chicken or pork.

It also helps us isolate the effects of specific Suppose that average consumer income rises.
changes
in a market that will manifest as so-called “shift 106
factors.” 00:10:14,030 --> 00:10:18,580
Which direction do you think the demand curve is
97 likely to shift in this case?
00:09:23,170 --> 00:09:29,280
For example, in order to draw the demand curve in 107
the two-dimensional space of price and quantity, 00:10:18,880 --> 00:10:24,870
Inward and to the left? Or outward and to the
98 right?
00:09:29,280 --> 00:09:35,000
we have to hold a bunch of other important things 108
constant that also affect the demand curve. 00:10:24,870 --> 00:10:27,970
Please PAUSE the presentation now to think about
99 this.
00:09:35,340 --> 00:09:38,310
Just what are these “other things?” 109
00:10:27,970 --> 00:10:32,600
100 Then draw the shift either on a piece of paper or
00:09:38,430 --> 00:09:43,000 your computer.
Well, three of the most important of these so-
called “shift factors” are: 110
00:10:32,830 --> 00:10:36,140
101 Then when you are ready, just resume the
00:09:43,000 --> 00:09:49,890 presentation.
consumer income, consumer tastes, and the
prices of substitute products. 111
00:10:42,060 --> 00:10:45,520
102 So did you draw your demand curve like this?
00:09:50,250 --> 00:09:51,740
And here’s the Key Idea: 112
00:10:45,800 --> 00:10:50,650
103 In this case, the demand curve will certainly shift
00:09:51,740 --> 00:10:02,250 outward and to the right.
If one of these shift factors changes – income,
tastes, or the price of a substitute – 113
the demand curve will shift either inward or 00:10:50,830 --> 00:10:56,660
outward. This is because consumers with more money
in their pockets will tend to buy more of
104 everything.
00:10:03,050 --> 00:10:09,000
Now to see if you are wrapping your head around 114
this concept 00:10:57,510 --> 00:11:00,370
of shift factors, let’s do a quick example: Now here’s another brain twister for you:
105 115
00:10:09,280 --> 00:10:13,580 00:11:00,600 --> 00:11:06,650

Suppose you are analyzing the market for oatmeal
and the price of corn flakes falls. 125
00:12:11,850 --> 00:12:19,410
116 While people who eat onion rings every day tend
00:11:07,280 --> 00:11:13,400 on average to live several fewer years.
Which way do you think the demand curve for
oatmeal is likely to shift and why? 126
00:12:20,370 --> 00:12:25,050
117 Now once again PAUSE the presentation and write
00:11:24,600 --> 00:11:30,370 down or draw on your paper or tablet.
If you determined that the demand curve for
oatmeal will shift in, you're right. 127
00:12:25,050 --> 00:12:28,830
118 Which way you think the prune and onion ring
00:11:30,600 --> 00:11:37,950 demand curves will shift?
This is because oatmeal and corn flakes are
substitutes for each other in the broader market 128
for breakfast cereal. 00:12:39,470 --> 00:12:45,630
Now check this figure out. Did you draw your
119 graphs correctly?
00:11:38,250 --> 00:11:42,710
So, if the price of corn flakes goes down, 129
00:12:47,000 --> 00:12:51,850
120 Now to finish up the rest of this module, take a
00:11:42,710 --> 00:11:48,030 few minutes to study this table.
the demand for oatmeal will go down as
consumers buy more corn flakes. 130
00:12:51,850 --> 00:12:59,000
121 It summarizes the effect of the various shift
00:11:49,460 --> 00:11:54,830 factors, on the demand curve in the automobile
As for our third shift factor for the demand curve, market.
consumer tastes–
131
122 00:12:59,000 --> 00:13:04,940
00:11:54,830 --> 00:11:58,650 Note that besides income, the prices of related
this is a really important one for businesses to goods, and changing consumer tastes,
keep track of.
132
123 00:13:04,940 --> 00:13:11,450
00:11:59,050 --> 00:12:03,850 the table includes two other important shift
To see why, suppose that tomorrow the American factors: population and special influences.
Medical Association
133
124 00:13:11,740 --> 00:13:13,110
00:12:03,850 --> 00:12:11,850 From a business perspective,
publishes a report that says people who eat
prunes regularly live on average several years 134
longer. 00:13:13,110 --> 00:13:20,940

these are precisely the kinds of shift factors your
management and forecasting teams will be 143
wanting to chart very closely, 00:14:11,050 --> 00:14:18,360
ERIC: Yes. It appears that a lot of young new
135 car buyers with
00:13:20,940 --> 00:13:24,940 relatively lower incomes, will be coming on to the
and perhaps take profitable advantage of! market.
136 144
00:13:24,940 --> 00:13:29,800 00:14:18,600 --> 00:14:21,450
I’ll let our Business Toon Team shed a bit more KATE: I guess our marketing team should tailor
light on this subject. a message
137 145
00:13:32,440 --> 00:13:40,710 00:14:21,450 --> 00:14:26,140
ERIC: Our economics team just came in with a to increase our sales of small sub-compact
forecast of a cars to first time young buyers.
major increase in oil and gasoline prices over the
next five years. 146
00:14:26,430 --> 00:14:30,250
138 ERIC: Sounds like a solid plan. Now what's for
00:13:40,940 --> 00:13:43,400 lunch?
KATE: What is driving that price spike?
139
00:13:43,510 --> 00:13:51,420
ERIC: It appears to be a combination of rising
turmoil in many
oil producing nations and more regulation of shale
gas extraction.
140
00:13:51,850 --> 00:13:59,680
KATE: Based on that forecast, I am going to
recommend
we increase our production of more fuel-efficient
hybrid and all-electric cars.
141
00:13:59,800 --> 00:14:05,560
ERIC: We should probably also reduce our
production of “gas guzzling” Sport Utility
Vehicles.
142
00:14:05,970 --> 00:14:10,440
KATE: And by the way, the economics team has
also detected a demographic bulge.

Lesson 2 one of the four main food groups for starving
students - pizza.
Module 2 - Change in Demand vs.
8
Change in Quantity Demanded, The 00:01:06,920 --> 00:01:15,380
In the figure, we go from point A to point B as the
Market Demand and Supply Curves, price of pizza falls from P1 to P2.
and Supply Curve Shift Factors
9
1
00:01:15,610 --> 00:01:21,860
00:00:13,370 --> 00:00:20,980
And, quantity demanded goes from Q1 to Q2.
Okay. So far we have learned why demand curves
slope downward
10
and why supply curves slope upward.
00:01:22,240 --> 00:01:28,180
Note that this change in the quantity demanded is
2
due simply to a price change.
00:00:21,210 --> 00:00:30,150
We have also demonstrated how the demand and
11
supply curves
00:01:29,500 --> 00:01:35,440
can shift as factors like income and technology
In contrast, this figure illustrates a change in
change.
demand due to a shift factor –
3
12
00:00:30,240 --> 00:00:37,320
00:01:35,440 --> 00:01:40,520
In this module, we want to begin by making an
in this case an increase in demand for gluten-free
important distinction between these two
bread.
possibilities:
13
4
00:01:40,700 --> 00:01:43,210
00:00:37,320 --> 00:00:44,700
Prior to the change in demand,
Possibility One: A change in demand reflected in a
shift in the demand curve; and
14
00:01:43,210 --> 00:01:48,920
5
consumers demand a quantity of Q1 at a price of
00:00:44,700 --> 00:00:52,700
P1at Point A.
Possibility Two: A change in the quantity
demanded
15
as reflected in a movement along the demand
00:01:49,720 --> 00:01:55,270
curve.
However, news from a scientific study comes out
that gluten-free bread
6
00:00:53,720 --> 00:00:57,380
16
To draw this distinction, consider this figure:
00:01:55,270 --> 00:02:01,320
actually helps reduce problems of indigestion in
7
many gluten-sensitive consumers.
00:00:57,610 --> 00:01:06,700
It illustrates a movement along the demand curve
17
for
00:02:01,440 --> 00:02:07,670

After this news breaks, the demand curve shifts That's both a mouthful and a mindful so let me
outward from D1 to D2. repeat what I just said and highlight it as a Key
Definition:
18
00:02:08,070 --> 00:02:14,920 27
In this case, consumers will now be willing to buy 00:03:04,750 --> 00:03:11,270
Q2 at the same price of P1. The market demand curve is the horizontal sum of
the individual demand curves.
19
00:02:15,320 --> 00:02:22,070 28
As to why this distinction between a change in 00:03:11,380 --> 00:03:15,840
demand Now here’s what this Key Definition means in the
and a change in the quantity demanded is so real world of business:
important,
29
20 00:03:15,950 --> 00:03:22,640
00:02:22,070 --> 00:02:24,520 Marketing executives cannot simply build an
I will talk more about this in a bit. advertising strategy based on the total market
demand curve.
21
00:02:24,810 --> 00:02:28,240 30
For now, the Key Point is simply this: 00:03:22,640 --> 00:03:31,720
Instead, they must carefully analyze the market
22 data
00:02:28,240 --> 00:02:35,100 to better tailor their advertising messages to
Distinguishing clearly between shifts in the different market segments.
demand curve
versus movements along the demand curve 31
00:03:31,720 --> 00:03:36,750
23 Let’s let our Business Toon Team explain how this
00:02:35,100 --> 00:02:41,660 might work for a company
helps us pinpoint the source of any given change
in the market and attendant prices. 32
00:03:36,750 --> 00:03:40,900
24 operating nationally, but in many different regional
00:02:48,070 --> 00:02:51,500 markets.
Now, the last point I want to make about the
market demand curve 33
00:03:40,900 --> 00:03:44,280
25 ERIC: Our market segment analysis just came
00:02:51,500 --> 00:02:57,150 in and it shows that
is that it is actually the horizontal sum of the
individual demand curves. 34
00:03:44,280 --> 00:03:49,570
26 demand for our product is very seasonal in
00:02:57,320 --> 00:03:04,520 certain colder parts of the overall market.
35

00:03:49,900 --> 00:03:54,810 00:04:36,470 --> 00:04:43,090
KATE: I saw that. But what does that mean for Now see if you can draw a nice supply curve from
our advertising strategy? this data either on paper or on your computer.
36 46
00:03:55,210 --> 00:04:00,240 00:04:43,500 --> 00:04:46,130
ERIC: It means that we cannot simply rely on a And PAUSE the presentation so you can do this.
national advertising budget that provides
47
37 00:04:53,970 --> 00:04:58,480
00:04:00,240 --> 00:04:03,420 Okay. Does your corn flake supply curve look like
the same message to all segments of the this?
market.
48
38 00:04:58,480 --> 00:05:03,860
00:04:03,500 --> 00:04:06,700 And here, be sure that you have labeled price on
KATE: Of course, I see that now. the vertical axis,
39 49
00:04:06,700 --> 00:04:10,010 00:05:03,860 --> 00:05:07,610
We must adopt a more regional advertising and quantity on the horizontal axis.
strategy that
50
40 00:05:07,720 --> 00:05:11,280
00:04:10,010 --> 00:04:14,430 And note that I am bugging you about this
takes into account seasonal variations in because I've found that students
market segment demand.
51
41 00:05:11,280 --> 00:05:18,360
00:04:14,430 --> 00:04:18,090 often forget to label not only their axes, but the
Yes. One size does not fit all! demand and supply curves as well.
42 52
00:04:21,830 --> 00:04:25,210 00:05:18,360 --> 00:05:26,750
Okay. We’ve given a fair amount of attention to More often than not, that kind of sloppiness just
the demand curve. leads to confusion – and maybe a lower grade.
43 53
00:04:25,280 --> 00:04:32,180 00:05:26,750 --> 00:05:29,090
So let’s switch gears now and focus for a bit on So here’s my Key Point:
the equally critical supply curve.
54
44 00:05:29,090 --> 00:05:36,870
00:04:32,350 --> 00:04:36,240 Always, always, always label everything in your
Take a look at this supply schedule for the corn graphs and you will be way ahead of the game.
flakes market.
55
45 00:05:37,500 --> 00:05:44,520

Anyway, in this figure, you can see that firms will 00:06:46,920 --> 00:06:51,800
produce no corn flakes at all if the price is only 1. So just what are the most important shift factors
for the supply curve?
56
00:05:45,610 --> 00:05:50,810 66
If, however, the price is five, firms will produce 20. 00:06:52,240 --> 00:06:56,300
One of these is the state of the production
57 technology itself.
00:05:52,120 --> 00:06:00,070
And of course from the data, 67
you see that the supply curve is sloping nicely 00:06:56,300 --> 00:07:02,070
upward as expected. The more advanced the production, the more a
society will be able to produce.
58
00:06:00,520 --> 00:06:06,350 68
In other words, the lower the price, the less firms 00:07:02,300 --> 00:07:07,900
will produce. Another important shift factor includes the prices
of the various factors of production --
59
00:06:06,750 --> 00:06:11,050 69
And the higher the price, the more firms will 00:07:07,900 --> 00:07:17,380
produce. the land, labor, capital, energy, and other natural
resources
60 that might be needed to produce any given
00:06:17,610 --> 00:06:23,500 product.
Now, just as with shifts of the demand curve, we
have to look closely at the other things 70
00:07:17,720 --> 00:07:26,040
61 The Key Idea here is that any rise in factor prices
00:06:23,500 --> 00:06:25,500 – for example, wages, rents, or interest rates –
that we are holding constant...
71
62 00:07:26,040 --> 00:07:30,870
00:06:25,500 --> 00:06:30,980 make it more costly for industries to produce.
so we can come to understand why the supply
curve might shift as well. 72
00:07:31,320 --> 00:07:38,010
63 As still a third important shift factor, there is also
00:06:31,900 --> 00:06:37,780 government regulation.
It might shift out – indicating more supply at any
given price. 73
00:07:38,010 --> 00:07:41,840
64 Here, a new government regulation to improve the
00:06:38,750 --> 00:06:46,370 environment
Or the supply curve might shift in – indicating less
supply at any given price. 74
00:07:41,840 --> 00:07:47,100
65

or worker health and safety can often increase the
costs of doing business. 84
00:08:40,150 --> 00:08:45,610
75 with a new cost-saving computerized process for
00:07:47,610 --> 00:07:54,230 making corn flakes.
Which is why one of the favorite expressions of
economists is that there is no “free lunch.” 85
00:08:46,170 --> 00:08:49,870
76 What do you think will happen to the supply curve
00:07:54,230 --> 00:08:01,070 in this figure?
Meaning that social goods like cleaner air or safer
work places always come with a cost. 86
00:08:54,120 --> 00:08:58,240
77 That's right. The supply curve will shift outwards.
00:08:01,720 --> 00:08:07,840
It’s precisely because of the importance 87
of such factors of production in determining things 00:08:58,240 --> 00:09:05,500
like Meaning that for a given price, say at point B,
supply increases.
78
00:08:07,840 --> 00:08:13,440 88
the shape and slope and location of the supply 00:09:06,810 --> 00:09:11,720
curve in market space Now, what about a rise in labor costs due to a
tightening labor market?
79
00:08:13,440 --> 00:08:17,470 89
that we will spend several lessons just studying 00:09:11,900 --> 00:09:15,100
how wages and rents Which way will the supply curve shift now?
80 90
00:08:17,470 --> 00:08:22,260 00:09:18,750 --> 00:09:27,230
and interest rates are set in the labor, land, and That’s right – with a rise in a key factor input price
capital markets. like that for labor,
the supply curve shifts inward.
81
00:08:22,260 --> 00:08:29,480 91
And also study the role of government regulation 00:09:27,230 --> 00:09:31,610
in shaping the business environment. Meaning less supply at any given price.
82 92
00:08:29,480 --> 00:08:35,820 00:09:31,610 --> 00:09:40,980
For now, let’s see if you are fully grasping the Now how about a new government regulation
concept of supply curve shifts. limiting corn use in corn flakes to only corn that is
not genetically modified?
83
00:08:36,470 --> 00:08:40,150 93
So suppose, for example, that your company 00:09:41,550 --> 00:09:45,380
comes up

What happens to the supply curve for corn flakes BRIAN: Where do you stand on the new clean
then? air initiative sir?
94 102
00:09:48,460 --> 00:09:54,370 00:10:49,320 --> 00:10:55,700
Again, this regulatory shock would result in an ERIC: I am all for cleaner air, but this initiative
inward shift of the supply curve will result in an inward shift of the supply
curve.
95
00:09:54,370 --> 00:10:00,010 103
because corn costs will go up for corn flakes 00:10:55,700 --> 00:11:00,370
manufacturers. This will raise the costs of key manufacturing
industries vital to our economy.
96
00:10:00,770 --> 00:10:10,240 104
So do you see now how these supply curves work 00:11:00,370 --> 00:11:03,500
and how important EMMA: Sir. Clean air is not free any more.
they might be in determining the profitability of a
business? 105
00:11:03,500 --> 00:11:08,810
97 If we have to pay a bit more for the products
00:10:18,160 --> 00:10:22,120 we buy,
Okay. Let’s finish up this module with a that will be worth it to our society.
moderated debate between
106
98 00:11:09,100 --> 00:11:11,900
00:10:22,120 --> 00:10:28,960 BRIAN: But what about the impact of these
our dueling politicians in toon town, newer regulations
over the effects of government regulation on
business. 107
00:11:11,900 --> 00:11:18,300
99 on the ability of our domestic industries to
00:10:29,380 --> 00:10:39,210 compete with foreign nations with more lax
The idea as an economist is not to take any given regulations?
side,
but help identify the possible costs and competing 108
benefits. 00:11:18,300 --> 00:11:24,690
ERIC: That is exactly the problem. All we will do
100 is export our pollution to other countries.
00:10:39,670 --> 00:10:46,070
BRIAN (British): Our next set of questions in 109
this debate 00:11:24,690 --> 00:11:30,360
deal with the effects of government regulation on They will produce the products we once did
businesses. and sell them to us. That means fewer jobs.
101 110
00:10:46,070 --> 00:10:49,320 00:11:30,360 --> 00:11:34,920

EMMA: I agree with my opponent, but the real
solution is to require other countries
111
00:11:34,920 --> 00:11:39,840
that wish to sell us products to abide by the
same tough environmental laws we do.
112
00:11:40,120 --> 00:11:44,670
BRIAN: Well, at least the voters will have a
clear choice in this election.

Lesson 2 is exactly offset by the downward pressure on
price.
Module 3 - Equilibrium and Price
9
Effects of Supply and Demand Curve 00:00:59,490 --> 00:01:04,240
To put this another way, the equilibrium price is
Shifts the price towards
1 10
00:00:13,040 --> 00:00:16,870 00:01:04,240 --> 00:01:12,060
Okay. In this part of the lesson, we get to some of which the invisible hand of the market –
the really fun stuff. the dynamic forces of supply and demand – drives
the ultimate outcome.
2
00:00:17,090 --> 00:00:21,150 11
This is where I will show you how the forces of 00:01:13,550 --> 00:01:16,180
supply and demand Let's illustrate this point with this figure.
3 12
00:00:21,150 --> 00:00:26,680 00:01:16,640 --> 00:01:23,550
lead to a so-called equilibrium in the market and Note that where the two curves cross, the price is
thereby set the market price. P1 and the quantity is Q1
4 13
00:00:26,920 --> 00:00:30,810 00:01:23,550 --> 00:01:23,740
So…let's start out by defining what an equilibrium Now here is my claim:
is. Note that where the two curves cross, the price is
P1 and the quantity is Q1
5
00:00:31,320 --> 00:00:38,280 14
The concept of an equilibrium comes from physics 00:01:23,740 --> 00:01:25,380
-- specifically classical mechanics. Now here is my claim:
6 15
00:00:38,280 --> 00:00:46,030 00:01:25,380 --> 00:01:30,010
To say something is in equilibrium is to say that Through the forces of supply and demand, the
the dynamic forces pushing on it cancel each equilibrium price
other out.
16
7 00:01:30,010 --> 00:01:35,090
00:00:46,350 --> 00:00:54,350 will in fact be HERE where the two curves cross.
In the context of the analysis of supply and
demand, 17
equilibrium means that the upward pressure on 00:01:35,090 --> 00:01:39,090
price Now let me prove that to you with a couple of
experiments.
8
00:00:54,350 --> 00:00:59,380 18

00:01:40,180 --> 00:01:45,640 So what you think happens next in this market
Let's first suppose that the price is above P1 at because of the surplus?
P2.
29
19 00:02:46,470 --> 00:02:53,820
00:01:45,640 --> 00:01:50,470 Well, with that surplus of product piling up in their
In this case, firms are willing to supply Q3 warehouses,
firms will start lowering their price --
20
00:01:50,470 --> 00:01:54,480 30
at Point A on the supply curve. 00:02:54,240 --> 00:02:58,380
And they will keep lowering price right up to the
21 point
00:01:54,480 --> 00:01:59,150
However, consumers demand only Q2 at that 31
price 00:02:58,380 --> 00:03:06,750
where the surplus disappears at the intersection
22 of
00:01:59,150 --> 00:02:02,010 supply and demand and a quantity of Q1.
at Point B on the demand curve.
32
23 00:03:08,010 --> 00:03:14,240
00:02:02,470 --> 00:02:07,780 Okay. So that’s the case where the price is set too
At this price then, we have a so-called “surplus” in high
the market. and the market winds up with a surplus.
24 33
00:02:07,950 --> 00:02:19,320 00:03:14,480 --> 00:03:21,640
In this Key Definition, a surplus exists when Now what about the opposite case when the price
there is an excess of the quantity supplied over is set below
the quantity demanded. a point where the supply and demand curves
cross?
25
00:02:19,610 --> 00:02:26,470 34
So again, looking at the figure, what is the total 00:03:22,410 --> 00:03:28,070
surplus here at a price of P2? Take a look at this figure where the price is set at
P3 instead of P1.
26
00:02:29,720 --> 00:02:33,950 35
Did you calculate Q3 minus Q2? 00:03:28,470 --> 00:03:32,580
In this case, consumers will demand Q3.
27
00:02:34,350 --> 00:02:39,780 36
That is the difference between the quantity at 00:03:32,580 --> 00:03:37,840
Point B versus the quantity at Point A. However, producers will only supply Q2.
28 37
00:02:40,890 --> 00:02:46,120 00:03:37,840 --> 00:03:41,490

In this case, we have a “shortage.” 00:04:38,070 --> 00:04:45,480
Okay. By now you should be getting the hang of
38 just how powerful the dynamic forces of supply
00:03:41,950 --> 00:03:46,010 and demand are.
In this Key Definition, a shortage is defined simply
48
39 00:04:45,480 --> 00:04:53,450
00:03:46,010 --> 00:03:49,780 What we want to do next is illustrate how supply or
as an excess of the quantity demanded in the demand shifts in one market can ripple through to
market other markets.
40 49
00:03:49,780 --> 00:03:52,640 00:04:53,450 --> 00:04:59,540
over the quantity supplied. In fact, this is the essence of economic analysis in
a business context.
41
00:03:52,920 --> 00:03:58,980 50
So how big would you calculate the shortage to be 00:04:59,540 --> 00:05:05,890
in this case? If you can understand these economic ripples and
waves,
42 you will become a much better manager.
00:03:58,980 --> 00:04:03,110
It is simply the difference between Q3 and Q2. 51
00:05:06,640 --> 00:05:10,840
43 To see why, let’s run this scenario:
00:04:03,670 --> 00:04:08,920
At any rate, so what do you think firms are going 52
to do in this shortage situation? 00:05:10,840 --> 00:05:18,870
Suppose a major drought hits key wheat growing
44 areas of the globe like China, India, and Australia,
00:04:09,360 --> 00:04:15,700
Of course, with consumers clamoring for more of 53
their product, 00:05:18,870 --> 00:05:23,610
firms are likely to raise the price. and this drought severely damages the wheat
harvest.
45
00:04:15,700 --> 00:04:23,890 54
And they will keep on raising that price right up 00:05:24,010 --> 00:05:29,100
until it reaches the point How would you represent this situation in the
where demand and supply are once again in market for a finished product like bread
balance.
55
46 00:05:29,100 --> 00:05:33,780
00:04:23,890 --> 00:04:30,810 that relies heavily on wheat as a factor of
At this equilibrium point, in the jargon of production?
economics, the market is said to “clear.”
56
47 00:05:34,120 --> 00:05:41,210

And what do you think will happen in the market 66
for rice, 00:06:33,610 --> 00:06:40,640
which is a substitute for bread? price will rise to P2 and quantity will fall to Q2.
57 67
00:05:42,240 --> 00:05:46,120 00:06:40,640 --> 00:06:42,640
Please think this one carefully through and have Did you get that right?
fun with it
68
58 00:06:44,580 --> 00:06:50,410
00:05:46,120 --> 00:05:51,090 Now what about the market for rice, depicted on
as you PAUSE the presentation now, and use the right hand side of the figure?
supply and demand analysis
69
59 00:06:50,410 --> 00:06:53,940
00:05:51,090 --> 00:05:56,010 Well, we know that rice is a substitute for bread.
to depict this situation using this figure as your
starting point. 70
00:06:53,940 --> 00:06:58,810
60 Therefore, we can expect consumers to increase
00:05:56,430 --> 00:05:59,210 their rice consumption
Of course, when you are ready, resume the
presentation. 71
00:06:58,810 --> 00:07:04,470
61 as the price of bread rises because of both an
00:05:59,210 --> 00:06:05,040 income and a substitution effect.
and that’s one of the nicer things about online
education. YOU are in control. 72
00:07:04,980 --> 00:07:07,440
62 This can be depicted in the figure
00:06:12,690 --> 00:06:16,120
Okay. Let’s start with the bread market on the left. 73
00:07:07,440 --> 00:07:11,550
63 by a rightward and outward shift of the demand
00:06:16,580 --> 00:06:22,760 curve for rice.
Because of the drought, bakers will have to pay
more for a key factor input, namely, wheat. 74
00:07:11,960 --> 00:07:17,320
64 In the new equilibrium, you can see that both
00:06:22,760 --> 00:06:28,960 price and quantity rise.
This will result in an inward shift of the bakers’
supply curve for bread. 75
00:07:18,430 --> 00:07:26,640
65 So…the bottom line? The bad wheat harvest not
00:06:28,960 --> 00:06:33,610 only affects
As bakers offer less bread to consumers at any price and quantity in the bread market
given price, equilibrium.

76 KATE: So if I'm a commodities trader, I might
00:07:26,640 --> 00:07:30,750 buy rice futures.
It also drives the outcome in the rice market.
86
77 00:08:17,210 --> 00:08:23,450
00:07:30,750 --> 00:07:33,980 That way, if the price of rice does go up as
So how is this kind of analysis helpful in business? expected, I will make a profit on that trade.
78 87
00:07:34,290 --> 00:07:40,450 00:08:23,610 --> 00:08:28,500
Well, if you are an agricultural commodities trader SIMON: That would certainly be an intelligent
or perhaps a large Asian restaurant chain speculation
based on sound microeconomic analysis.
79
00:07:40,450 --> 00:07:48,670 88
that uses a lot of rice, this kind of supply and 00:08:29,270 --> 00:08:34,180
demand framework KATE: But how about if I am a top manager at
can be invaluable in helping you maintain a large chain of Asian restaurants?
profitability.
89
80 00:08:34,180 --> 00:08:38,420
00:07:48,670 --> 00:07:53,090 Won't higher rice prices eat into my company's
Or perhaps just help you prevent taking a big loss. profits?
81 90
00:07:53,090 --> 00:07:56,240 00:08:38,640 --> 00:08:44,180
Let’s let the Business Toon Team explain why: SIMON: Yes, higher rice prices will hurt. But
you can use a financial instrument called a
82 hedge.
00:07:56,470 --> 00:08:01,720
KATE: I read today in the newspaper that the 91
global price of wheat is going up because of a 00:08:44,180 --> 00:08:47,970
drought. A hedge can insulate you from higher rice
costs.
83
00:08:02,070 --> 00:08:07,150 92
SIMON: Yes, that's right. And I learned last 00:08:47,970 --> 00:08:50,260
night at business school that a rise in the price of KATE: What exactly is a hedge?
wheat
93
84 00:08:50,260 --> 00:08:54,400
00:08:07,150 --> 00:08:12,190 SIMON: It is a tool to protect against price
is also going to drive up rice prices because of changes in your supply chain.
income and substitution effects.
94
85 00:08:54,400 --> 00:08:59,970
00:08:12,640 --> 00:08:17,210 But you will have to wait for a more detailed
definition

until we come to that lesson later on in this
course. 104
00:09:45,720 --> 00:09:52,520
95 For example, rising feed prices for cows might
00:08:59,970 --> 00:09:05,410 trigger an inward supply side shift?
KATE: Okay. But let’s go have Asian food
tonight before the price might go up. 105
00:09:52,520 --> 00:09:54,290
96 So what do you think?
00:09:05,780 --> 00:09:09,840
Okay. We’ve got one more task in this module and 106
that is to take a 00:09:54,290 --> 00:10:01,040
Is the rise in the price of butter likely to be caused
97 by
00:09:09,840 --> 00:09:17,500 a demand side or a supply side effect?
bit more of a sophisticated look at how to interpret
changes 107
in price and quantity that we observe in the 00:10:11,800 --> 00:10:16,070
marketplace. Well, this is kind of a trick question because
without more information,
98
00:09:17,670 --> 00:09:22,870 108
Suppose, then, you go to the store and see that 00:10:16,070 --> 00:10:18,180
the price of butter has doubled. you simply can’t know.
99 109
00:09:22,870 --> 00:09:25,040 00:10:18,180 --> 00:10:25,380
Has the demand for butter risen? It could be either a supply or demand effect, or
even both effects simultaneously.
100
00:09:25,490 --> 00:09:31,950 110
This might happen, for example, because a new 00:10:25,380 --> 00:10:32,160
study In fact, economists and businesses must deal with
comes out says butter is actually good for your this kind of fundamental question all the time--
heart
111
101 00:10:32,640 --> 00:10:36,870
00:09:31,950 --> 00:09:35,490 Specifically: When prices or quantities change in a
rather than a contributor to heart disease. market,
102 112
00:09:35,490 --> 00:09:39,040 00:10:36,870 --> 00:10:42,750
FAT chance there. Pun intended. does the situation reflect a fundamental change in
demand or supply?
103
00:09:39,040 --> 00:09:45,720 113
Or, alternatively, maybe butter has become more 00:10:43,440 --> 00:10:47,550
expensive because of a supply side effect. Now here is a Key Tip to help you sort this out:

114
00:10:47,550 --> 00:10:57,430
Sometimes in simple situations, by looking at
price and quantity simultaneously,
you may find the clue to solving the mystery.
115
00:10:57,780 --> 00:11:04,180
For example, a rise in the price of bread
accompanied by a decrease in quantity
116
00:11:04,180 --> 00:11:09,320
suggests that the supply curve has shifted inward,
to the left.
117
00:11:09,550 --> 00:11:15,210
In contrast, a rise in price accompanied by an
increase in quantity
118
00:11:15,210 --> 00:11:22,410
indicates that the demand curve has probably
shifted outward and to the right.
119
00:11:22,410 --> 00:11:25,150
Got it? Okay!
120
00:11:25,320 --> 00:11:30,350
Then take a rest, and when you are ready, just
move on to the next module
121
00:11:30,350 --> 00:11:36,290
to study the scintillating topic of price floors and
ceilings.

Lesson 2 00:01:00,230 --> 00:01:05,390
the price floor” and the “price ceiling.
Module 4 - Price Floors and Price
10
Ceilings 00:01:05,390 --> 00:01:08,180
1 So here’s two Key Definitions:
00:00:13,080 --> 00:00:15,890
As we will learn in several future lessons, 11
00:01:08,180 --> 00:01:16,750
2 A price floor sets a minimum price for a product
00:00:15,890 --> 00:00:22,400 that
it’s not uncommon for the government to may well be a level above that of the market
intervene into the free market for any number of equilibrium.
purposes.
12
3 00:01:18,060 --> 00:01:27,200
00:00:22,460 --> 00:00:28,860 In contrast, a price ceiling may be set at a level
Sometimes, such intervention is to correct what well below
the government perceives to be a market failure – what would be the actual price at market
equilibrium.
4
00:00:28,860 --> 00:00:32,400 13
with the goal of making the market more efficient. 00:01:28,060 --> 00:01:30,060
Now think about this for a moment:
5
00:00:32,400 --> 00:00:39,450 14
At other times, the government may intervene 00:01:30,060 --> 00:01:35,830
simply to redistribute income from one group to Which type of government intervention is likely to
another – lead to shortages in the market?
6 15
00:00:39,450 --> 00:00:48,040 00:01:35,830 --> 00:01:38,980
often with an improvement in equity within the And which is likely to lead to surpluses?
society but often with a loss in market efficiency
as well. 16
00:01:50,480 --> 00:01:55,110
7 Let’s answer that question by doing our own
00:00:48,630 --> 00:00:53,670 market analyses.
To better understand the market consequences of
such government intervention, 17
00:01:55,110 --> 00:01:58,410
8 And let’s start with the case of a price floor.
00:00:53,670 --> 00:01:00,230
let’s use our supply and demand framework to 18
examine two common forms of government 00:01:58,410 --> 00:02:06,500
intervention – In fact, this tool is frequently used in many other
countries around the world,
9 particularly in the farming sector.

29
19 00:03:08,130 --> 00:03:12,690
00:02:06,500 --> 00:02:12,060 That’s right, the surplus is equal to Q3 minus Q1.
Such so-called “price support” programs are used
for products ranging from milk, 30
00:03:13,830 --> 00:03:20,460
20 Okay, now let’s do the case of a price ceiling; and
00:02:12,060 --> 00:02:15,200 let’s use a pretty interesting historical example.
corn and wheat, to peanuts and sugar.
31
21 00:03:20,750 --> 00:03:25,090
00:02:15,200 --> 00:02:20,860 In particular, during World War II, the American
And they typically set a price floor for the farmers' government
commodities and crops.
32
22 00:03:25,090 --> 00:03:31,150
00:02:20,860 --> 00:02:24,860 instituted price controls on most consumer goods,
Typically, if the market price falls below this floor, including many types of food.
23 33
00:02:24,860 --> 00:02:32,120 00:03:31,500 --> 00:03:36,500
the government then makes up the difference to This figure shows what happened in the market
the farmer, for bread during the war.
in essence, by buying up any of the farmers’
surpluses. 34
00:03:36,800 --> 00:03:42,290
24 You can see that the market price would normally
00:02:33,610 --> 00:02:37,780 be at P1 per loaf
This figure illustrates such a price floor for milk.
35
25 00:03:42,290 --> 00:03:46,970
00:02:37,780 --> 00:02:45,620 at Point A, where the supply and demand curves
As with all our graphs, price is on the vertical axis cross.
and quantity is on the horizontal axis.
36
26 00:03:46,970 --> 00:03:53,730
00:02:45,620 --> 00:02:49,460 However, after the government set a price ceiling
Note that the market price is at P1, of P2, well below the market equilibrium,
27 37
00:02:49,460 --> 00:02:54,630 00:03:53,730 --> 00:04:02,150
But the price floor has been set well above that at this created a shortage in the market equal to the
P2. difference between Q3 and Q1.
28 38
00:02:55,530 --> 00:02:59,090 00:04:02,150 --> 00:04:07,370
So what’s the surplus equal to in this case? And by the way, the tool that the government used
to manage this shortage

39 48
00:04:07,370 --> 00:04:11,570 00:05:02,120 --> 00:05:09,150
was to create a system of what is called The broader point here is that once you interfere
“rationing.” with the market mechanism,
all sorts of things can happen –
40
00:04:11,570 --> 00:04:18,670 49
In this particular rationing system, consumers 00:05:09,150 --> 00:05:13,660
couldn’t shortages,surpluses, black markets, and so on.
go to the store and just pay for a loaf of bread.
50
41 00:05:13,660 --> 00:05:19,720
00:04:19,260 --> 00:04:25,830 That’s one reason why many societies prefer to
They also had to present a ration card that gave rely primarily on the market system.
them the right to purchase the bread.
42
00:04:25,950 --> 00:04:34,730
In this way, the government replaced the market
as the mechanism
to answer the “for whom” question as to who got
the bread.
43
00:04:34,980 --> 00:04:41,320
So during the war, poor people had as much
access to bread as rich people.
44
00:04:41,860 --> 00:04:44,400
Of course, that all sounds pretty fair –
45
00:04:44,400 --> 00:04:50,950
but in this kind of situation,
one likely outcome is the rise of a so-called “black
market,”
46
00:04:50,950 --> 00:04:55,830
in which entrepreneurial people resell their
products to make a profit
47
00:04:55,830 --> 00:05:01,200
in an underground economy far from the prying
eyes of the government.

Lesson 2 10
Module 5 - Supply & Demand 00:00:57,750 --> 00:01:02,210
For example, higher oil prices will stimulate more
Analysis in Business Action oil production,
1
00:00:12,950 --> 00:00:15,010 11
In this final module of our lesson, 00:01:02,210 --> 00:01:08,040
while lower food prices will drive resources out of
2 agriculture.
00:00:15,010 --> 00:00:18,090
we are going to focus on some really interesting 12
applications 00:01:08,040 --> 00:01:16,380
Similarly, if oil prices fall, automobile
3 manufacturers will build fewer electric and hybrid
00:00:18,090 --> 00:00:22,440 cars
of supply and demand analysis in a business
context. 13
00:01:16,380 --> 00:01:23,690
4 while a rise in the price of copper,
00:00:22,550 --> 00:00:26,750 will lead to more plastic irrigation piping being
But before we go there, let’s first summarize how produced.
the market system,
14
5 00:01:24,090 --> 00:01:30,840
00:00:26,750 --> 00:00:32,240 As for the “for whom,” question,
through the forces of supply and demand, the cold truth here is that in a purely market-
addresses the problem of scarcity and driven system,
6 15
00:00:32,240 --> 00:00:36,670 00:01:30,840 --> 00:01:35,180
the three big questions that any economic system the power of the purse will dictate patterns of
must address. consumption.
7 16
00:00:37,240 --> 00:00:43,180 00:01:35,350 --> 00:01:42,550
As you may recall from Lesson One, these three To wit: Those with higher incomes as a group
big questions are: will end up with the larger houses, more clothing,
8 17
00:00:43,180 --> 00:00:51,690 00:01:42,550 --> 00:01:48,780
What shall be produced? How shall it be higher quality food, better health care, longer
produced? And for whom shall it be produced for? vacations, and so on.
9 18
00:00:51,690 --> 00:00:57,640 00:01:49,290 --> 00:01:54,150
On the “what” question, this is answered by the Even the “how” question is decided by the forces
myriad of signals of market prices. of supply and demand.

00:02:32,950 --> 00:02:39,250
19 And that issue of income inequality is certainly
00:01:54,150 --> 00:01:56,510 one we will revisit in a later lesson.
For example, when corn prices are low,
30
20 00:02:39,470 --> 00:02:45,380
00:01:56,510 --> 00:02:01,350 For now, however, let's end this lesson with some
it is less profitable for farmers to use expensive examples from our Business Toon Team
tractors and irrigation systems,
31
21 00:02:45,380 --> 00:02:51,470
00:02:01,670 --> 00:02:04,590 about how the supply and demand framework can
and only the best land is cultivated. be put to work to help all sorts of businesses,
22 32
00:02:04,590 --> 00:02:08,130 00:02:51,470 --> 00:02:58,350
By the same token, when oil prices are high, as well as the occasional homeowner, either
increase their profits or simply cut their costs.
23
00:02:08,130 --> 00:02:13,240 33
oil companies will drill many more wells in deep 00:02:59,180 --> 00:03:03,980
offshore waters So here’s the hypothetical situation our Business
Toon Team will be working with:
24
00:02:13,240 --> 00:02:17,980 34
and employ very different, and more expensive 00:03:04,040 --> 00:03:08,610
extraction technologies. Each member of the team has noticed a small
story on their favorite news blog
25
00:02:17,980 --> 00:02:21,240 35
So that’s the big market mechanism picture. 00:03:08,610 --> 00:03:13,920
about the possibility in the coming year of an El
26 Niño weather condition.
00:02:21,410 --> 00:02:25,070
It is a very interesting, and sometimes very 36
unsettling picture – 00:03:13,920 --> 00:03:16,040
In the comments on that blog,
27
00:02:25,070 --> 00:02:28,320 37
particularly when it comes to the “for whom” 00:03:16,040 --> 00:03:21,960
question they have seen that during El Niños,
two particular weather patterns are present.
28
00:02:28,320 --> 00:02:32,720 38
and the role of wealth in determining who in 00:03:21,960 --> 00:03:25,460
society gets what. Winter temperatures tend to be much higher and,
29 39

00:03:25,460 --> 00:03:30,040 00:04:13,690 --> 00:04:18,840
there is above average rainfall and often flooding. Sales and profits are sure to be down. Stock
prices will fall because of that.
40
00:03:30,550 --> 00:03:34,150 50
So let’s see now how our Toon Team members 00:04:18,840 --> 00:04:20,950
Francine: That is a pretty obvious strategy
41
00:03:34,150 --> 00:03:39,440 51
are going to make some money from this 00:04:20,950 --> 00:04:26,890
unfortunate weather news. and you can see that stock prices are already
falling in that sector.
42 Do you have anything more clever?
00:03:41,010 --> 00:03:45,640
EMPLOYEE: Chief. So what are we going to do 52
about this El Nino weather condition? 00:04:26,890 --> 00:04:30,210
Jacque: Yes. I think we should buy stock in a
43 good company that
00:03:45,640 --> 00:03:49,920
CHIEF: I believe we should start by reducing 53
our oil inventories for the upcoming winter. 00:04:30,210 --> 00:04:33,240
gets a lot of revenue from selling allergy
44 medicines.
00:03:50,150 --> 00:03:53,290
We must also consider laying off some of our 54
workers. 00:04:33,320 --> 00:04:38,670
Francine: Now. That is very clever. More rain
45 will mean more flowering plants and pollen.
00:03:53,520 --> 00:03:56,890
EMPLOYEE 2: I sure hope the boss is not 55
talking about me. 00:04:38,670 --> 00:04:42,840
That, in turn, means a more severe allergy
46 season.
00:04:00,490 --> 00:04:04,610
Francine: It looks like the forecast is for an 56
unusually warm and wet winter in China, 00:04:42,840 --> 00:04:47,980
Jacque: Yes. And bigger profits for the
47 company and a higher stock price.
00:04:04,610 --> 00:04:09,180
Europe and the United States this year. What is 57
our strategy? 00:04:48,210 --> 00:04:54,610
Francine: Can we go inside now? Our clients
48 will think we are really dumb if we stay out here in
00:04:09,350 --> 00:04:13,410 the cold.
Jacque: Well, we certainly should sell all of our
home heating oil stocks. 58
00:04:55,690 --> 00:05:01,120
49

Camilla: Charles, my dear. When are you going DEXTER: Yes, that will shift our demand curve
to get our leaky roof fixed? out.
59 69
00:05:01,120 --> 00:05:03,520 00:05:41,410 --> 00:05:44,670
The forecast is for more rain this winter. So I recommend we speed up the construction
of our new coffee shops in the
60
00:05:03,520 --> 00:05:06,610 70
Charles: Camilla. You are so right to remind 00:05:44,670 --> 00:05:47,870
me. Pacific Northwest where the rain is likely to be
heaviest.
61
00:05:06,610 --> 00:05:11,470 71
If we wait too long, the demand for roofers is 00:05:48,320 --> 00:05:50,090
going to go sky high. CALLIE: But we also have this problem.
62 72
00:05:11,470 --> 00:05:15,120 00:05:50,090 --> 00:05:53,980
We will wind up paying a much higher price for Flooding in key coffee growing areas may
the repair. result in a bad coffee crop
63 73
00:05:15,120 --> 00:05:18,090 00:05:53,980 --> 00:05:56,440
Camilla: Yes. It might be a king’s ransom. and we might have to pay more for coffee beans.
64 74
00:05:22,380 --> 00:05:26,670 00:05:56,490 --> 00:06:02,440
CALLIE: I need your advice Dexter, on how to DEXTER: That is an easy fix. We can go into the
deal strategically with the upcoming winter, coffee futures market
and lock in the price of coffee beans now.
65
00:05:26,670 --> 00:05:29,010 75
which is likely to be unseasonably wet. 00:06:02,670 --> 00:06:07,070
CALLIE: But what if we pay for those coffee
66 futures and the price of coffee does not rise?
00:05:29,010 --> 00:05:33,410
DEXTER: I am happy to do whatever I can do to 76
help the Chief Financial Officer of my 00:06:07,240 --> 00:06:11,120
company. DEXTER: Well, it will be a smaller price to pay
for insurance with coffee futures than
67
00:05:33,430 --> 00:05:38,670 77
CALLIE: Well, when it rains more, people get 00:06:11,120 --> 00:06:13,980
more depressed, and they drink more coffee. than risking a big spike in coffee bean
prices.
68
00:05:38,670 --> 00:05:41,410 78

00:06:14,210 --> 00:06:18,380 00:06:59,690 --> 00:07:02,150
CALLIE: Okay. Please get the word out to the In the meantime, please remember that
team to implement our strategy.
88
79 00:07:02,150 --> 00:07:07,350
00:06:18,380 --> 00:06:20,780 economics is not something to memorize but
And now let us go grab a cup of coffee! rather something to conceptualize.
80 89
00:06:21,010 --> 00:06:27,350 00:07:07,470 --> 00:07:10,440
Well, I think you are getting a handle on the big So as you study it, think about it too.
picture
that supply and demand analysis helps bring into 90
focus. 00:07:10,440 --> 00:07:15,180
Your job and your business just might depend on
81 it.
00:06:27,520 --> 00:06:30,090
Now here’s my final thought for you: 91
00:07:15,180 --> 00:07:21,010
82 From the Paul Merage Business School at the
00:06:30,090 --> 00:06:35,870 University of California-Irvine, I’m Peter Navarro.
In business, you should never gamble where the
odds of success are only 50-50 or less. 92
00:07:21,290 --> 00:07:22,550
83 We’ll see you next time.
00:06:35,920 --> 00:06:41,870
Instead, you want to be an intelligent speculator
always trying to move the odds in your favor.
84
00:06:41,870 --> 00:06:48,780
As I have just shown you with a number of
examples,
that’s exactly what a mastery of supply and
demand analysis
85
00:06:48,780 --> 00:06:52,090
can help you do in many different areas of
business.
86
00:06:52,270 --> 00:06:59,690
In the next lesson, we will delve more deeply into
the mysteries of the demand side of the supply
and demand framework.
87

Lesson 2: Module 1 - The Law of Demand, Income-Substitution Effects, and Demand Curve Shift Factors

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Lesson 2 00:00:52,100 --> 00:00:58,250

© Peter Navarro MICROECONOMICS

© Peter Navarro MICROECONOMICS

© Peter Navarro MICROECONOMICS

© Peter Navarro MICROECONOMICS

© Peter Navarro MICROECONOMICS

© Peter Navarro MICROECONOMICS

© Peter Navarro MICROECONOMICS

© Peter Navarro MICROECONOMICS

© Peter Navarro MICROECONOMICS

© Peter Navarro MICROECONOMICS

© Peter Navarro MICROECONOMICS

© Peter Navarro MICROECONOMICS

© Peter Navarro MICROECONOMICS

© Peter Navarro MICROECONOMICS

© Peter Navarro MICROECONOMICS

© Peter Navarro MICROECONOMICS

© Peter Navarro MICROECONOMICS

© Peter Navarro MICROECONOMICS

© Peter Navarro MICROECONOMICS

© Peter Navarro MICROECONOMICS

© Peter Navarro MICROECONOMICS

© Peter Navarro MICROECONOMICS

© Peter Navarro MICROECONOMICS

© Peter Navarro MICROECONOMICS

© Peter Navarro MICROECONOMICS

© Peter Navarro MICROECONOMICS

© Peter Navarro MICROECONOMICS

© Peter Navarro MICROECONOMICS

© Peter Navarro MICROECONOMICS

© Peter Navarro MICROECONOMICS

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