Shifts in Supply and Demand

  

Categories: Econ

You know when you read or hear a word so many times it starts to seem like something...alien? Well, that’s supply and demand for anyone who’s been anywhere near the field of economics.

Let’s break it down.

Supply is the goods (physical things you can buy) and services (not physical goods, but things you have others do to help you...think: marketing, hairdressers, financial advisers, etc.) that companies and people make. Demand is what goods and services people actually want to buy.

When supply and demand meet, it’s a beautiful thing: exactly the amount of stuff that was made was also bought, and that’s at a certain price that we call the “equilibrium.”

When there’s high demand and low supply, the price of the supply can go up. Because there’s not that much of the good/service and a lot of people want it, prices rise. Think of Uber on a Friday or Saturday night: lots of drunk people who want rides, and not as many Uber drivers to haul their drunken butts around as usual...so prices surge.

When there’s low demand and high supply, suppliers have a surplus. Too much stuff and not enough people to buy it—at least at the normal, equilibrium price.

So how to get people to buy it? Lower the price. Stores like TJ Maxx and Ross are a good example of this: the same stuff is sold to consumers there that it was elsewhere, but at a lower price, because it didn’t sell at the other stores from too much supply.

Supply and demand works the same in macroeconomics, but on a larger scale, which means larger consequences. A low supply of Ubers and a high demand from drunk people who are pissed at the high prices is nothing compared to a low supply of a staple food to an entire country (then the whole country is pissed at the lack of supply and/or higher prices on the little supply available). Likewise, having a surplus is a much bigger deal in macroeconomics.

It’s important to think about how things work internationally, too. For instance, the U.S. subsidizes their farmers. Why? If U.S. farmers were to compete with international farmers, they would quickly disappear from the market, because imported stuff is cheaper. So we subsidize farmers to artificially change the supply situation of food that farmers produce in the U.S., likely because we don’t want to be dependent on other countries for our food, even if it is cheaper.

Related or Semi-related Video

Econ: What is Money Supply?4 Views

00:00

And finance Allah Shmoop What is the money supply the

00:07

money supply Well it's the supply of money Yeah Thank

00:11

you everyone Good night All right We'll go to a

00:13

bit more detail here first Let's define the money Part

00:16

of the money supply will Money is the liquid financial

00:20

stuff moving around the economy And it's also all those

00:23

coins back Your couch Yeah it's liquid money And no

00:26

we don't mean liquid like these things We mean liquid

00:30

like these things Yeah Ching Well money is cash no

00:35

bills and coins and easily liquid lee sellable financial instruments

00:39

that can get turned into cash very easily So what's

00:43

money again Well the seven bucks you have in your

00:45

wallet it's the sixty eight cents in change in that

00:48

couch cushion right there Yeah along with a gun And

00:51

it's one hundred twelve dollars Forty five cents in your

00:53

Bank of America checking account Yeah that's counted his money

00:56

to its liquid You could just sign a piece paper

00:59

put the numbers on it and turns into catch value

01:01

due right away So that's what we called money is

01:03

in money supply We add up the stuff and everyone's

01:06

while in their one's couch cushions Everyone's banking accounts and

01:09

plus a few other types of accounts that quickly get

01:11

turned into cash like money market accounts at a brokerage

01:14

stuff like that And you've got the money supply in

01:17

the economy That's it Well there are a few different

01:19

measures of the money supply M one m two an

01:23

m three sounds like a list of promotional James Bond

01:27

bosses But no they're different That's different him Their economic

01:30

statistics put together by the Federal Reserve to track the

01:33

size of the money supply helps them kind of think

01:37

about what policies they want to implement We'll em One

01:39

is the most narrow definition It only includes the amount

01:42

of currency in circulation plus things that can get turned

01:45

into currency almost instantly You know stuff like traveler's checks

01:48

and the money and checking accounts Stuff like that Well

01:51

em to then includes all the stuff in M one

01:53

plus the money and things like savings accounts And while

01:56

some money market accounts that kind of stuff then we

01:59

have M three but includes all the above stuff plus

02:01

some long term deposits like you commit to putting five

02:05

grand and your savings account of Bank of America You

02:08

can't withdraw it early or you pay a big penalty

02:10

So that's kind of a long term deposit You get

02:13

a little bit more interest in return for being ill

02:16

liquid for six months So all those numbers those dollars

02:19

are included an M three But well guess what It

02:22

got expensive to track him three And now they're federal

02:24

Cut the budget and Fed just doesn't track him three

02:27

anymore Over time the Fed noticed that money supply measures

02:31

really didn't relate a strongly to economic performance as they

02:34

once did like thirty forty fifty years ago Well the

02:37

process started in the eighties and by two thousand six

02:39

the Fed decided that tracking M three as well you

02:42

know more trouble than it was worth Well the feds

02:44

still tracks and wanting him to though uses those stats

02:47

less and less than it used to mean ing away

02:50

back in the twentieth century for making policy decisions Yeah

02:53

anyway in two thousand eighteen M one set at about

02:56

three point seven trillion dollars an M to it about

02:59

thirteen point nine trillion noticed How much bigger M too

03:02

is an M one Okay so that's the money part

03:05

of money supply But what about the supply concept here

03:08

Well the basic concepts of economics are all about supply

03:11

and demand Right But when we think of supplying the

03:13

man we think of the supply and demand of a

03:15

product There's only so much triple ripple chocolate peanut butter

03:19

ice cream in the world that's supply or the supply

03:22

of it Four hundred ninety two million pounds That's it

03:24

Well there are many people who think it's the best

03:26

flavor and want to eat it by the gallon That's

03:29

demand Those air people are willing to pay four bucks

03:31

a gallon for it or whatever cost not supply then

03:34

meets the man How do you dio and you get

03:36

a price But notice something about that price That price

03:40

here Well it's given in money There's a second supply

03:43

situation going on in any price The money supply You

03:47

know how your great grand parents will say things like

03:49

when I was your age and ice cream cone cost

03:52

a quarter It's not that they used to eat little

03:55

itty bitty tiny ice cream cones Things used to cost

03:58

less at least in nominal terms like it took less

04:01

cash to get stuff fewer pennies like back then Penny's

04:05

actually matter And that didn't have anything to do with

04:07

the supply or demand for ice cream It had to

04:09

do with the supply of money For as long as

04:12

most people can remember while things have been steadily getting

04:15

more expensive right or at least more dollars to buy

04:17

stuff that's inflation The value of a unit of money

04:20

like the dollar has gone down because well there are

04:23

more of them more units of money floating around making

04:26

things more expensive more supply of money Things cost more

04:29

in terms of the amount of dollars But we also

04:32

earn Mohr you know in terms of the amount of

04:35

dollars right Like a good wage a hundred years ago

04:37

was like a dollar an hour maybe a dollar a

04:39

day and today it's like a dollar a minute Go

04:43

to see your dentist Been there done that Well that's

04:45

why when you compare prices or wages with the past

04:49

you have to use an inflation adjusted figure right You

04:52

want to measure the buying power of a particular dollar

04:55

otherwise things in the past always looked really cheap right

04:58

Like we might talk about things in nineteen seventy two

05:00

dollars Yes we're kind of anchoring the notion of the

05:03

money supply itself Released how valued that money was alright

05:07

Recap time Money supplies the amount of cash in an

05:09

economy along with certain financial instruments and accounts that get

05:12

turned into cash pretty easily The Fed measures money supply

05:16

of U S dollars using m one m two They

05:18

used to have a thing called them three but no

05:20

BMWs driving that around now And the money supply comes

05:23

into play in the way prices air set When buying

05:26

something you have the supply and demand dynamics of the

05:28

product you're looking to buy But you also have the

05:30

amount of available money Yeah which goes into the price

05:33

of things as well That's it Enjoy your fudge ripple

05:36

there Well count coins

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