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Week 0 Review: 10 Principles; Supply & Demand — Transcript

by Yue Riesbeck's Classroom · 4,381 words · 650 segments · language en · Watch on YouTube

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0:02Hello everyone. This video, in this
0:04video, we're going to review just a few
0:06key concepts from microeconomics.
0:09I believe most of you have taken
0:11microeconomics. However, that might be
0:13from last semester or even a couple
0:14semesters ago. So, these are some of the
0:17basic concepts from microeconomics, but
0:19the concepts may not be fresh on your
0:23mind anymore. Um, so this serves as a
0:25refresher of those concepts because
0:27you're going to see them in
0:28macroeconomics quite a bit as well. And
0:32uh if you've never taken microeconomics,
0:34so these are some of the basic concepts
0:36and I will try to explain them to you as
0:39clearly as possible also as quickly as
0:41possible because we do need to uh once
0:44next week starts we're going to move
0:45into our macroeconomics topics but
0:48you're going to see them again and again
0:50like you know later especially the 10
0:52principles of economics. you're going to
0:53see them again and again as we're
0:55explaining some of the macroeconomics
0:57concepts and I will u somewhat go into
1:00some details in some of these like you
1:02know in in some other times as well
1:04later this semester but this is just
1:06like one-stop shop quick refresher of
1:10some of the concepts here. Okay. So 10
1:12principles of economics that's a first
1:15week's content for microeconomics.
1:18So uh we're going to break it into three
1:22chunks. Okay. So the first part we're
1:24looking at a principle one through four.
1:27It's about how people make decisions.
1:30How people make decisions. And you see
1:33principle one is people face tra uh
1:35tradeoffs. Principle two is a cost of
1:38something is what you give up to get it.
1:40Principle three is rational people think
1:42at a margin. And principle four is
1:46people respond to incentives.
1:49So we're going to look at principle one.
1:51People face tradeoffs. What does it
1:53mean? It means whenever you need to get
1:56something you want, you usually must
1:58give up another thing that you want. So
2:00it's about decision making. You're
2:02trading off one goal for the other. For
2:05example, you choose to come to MBCC for
2:09school. That means you are not going to
2:11Sunni Pali. You're not going to UDA
2:13University.
2:15You choose to have pizza for lunch,
2:18which means you're not having
2:19hamburgers. you're not having hot dogs.
2:21So, usually to get one thing you want,
2:23you're giving up another thing that you
2:25want.
2:27Similarly, as people, society faces
2:30tradeoffs too as well. So, usually we
2:33look at two sides, efficiency and
2:35equality. When we're making sure that um
2:38the economic pie is evenly distributed
2:42among the members of the economy, that's
2:45when we're focusing on equality.
2:47However, when we do that, efficiency
2:49sometimes is sacrificed in the process.
2:52If we're focusing on efficiency where
2:55the society gets the maximum benefits
2:58from its scarce resources, then
3:00sometimes equality is being sacrificed.
3:03So, the society faces trade-offs as
3:05well.
3:07So, moving to principle two, the cost of
3:10something is what you give up to get it.
3:13Okay. So, the first part is more about
3:15choices. Principle two is somewhat
3:17related to principle one. It's talking
3:20about the cost of something you give up.
3:22Right? So here if you've taken
3:25microeconomics you might know that we're
3:27going to talk about um opportunity cost.
3:30Right? So um the tradeoff in terms of
3:32the cost of something of something is
3:35what you give give up to get it means if
3:38you choose one option we're also
3:41thinking of the best next option you
3:44give up what it could be if you didn't
3:46choose this option you end up choosing
3:48some other options that option you give
3:51up the cost of something or the value of
3:54that is the cost of something you give
3:56up to be able to get to the thing that
3:58you actually choose to do if that makes
4:00sense. So, we're talking about
4:01opportunity cost, right? So, uh look at
4:04some examples. For example, you're
4:06looking at the pictures down here. Um
4:08let's say you have Friday night off and
4:11your best option in your mind is to go
4:14out hanging out with friends. Um maybe
4:17like you know um go to a restaurant,
4:19hang out with friends. However, you
4:21could also be working the gym. So when
4:24you're thinking of the cost of something
4:26like you know principle two the cost of
4:27something is what you give up to get it.
4:29So maybe going to the gym is your second
4:32best option in your mind. So the cost of
4:35going to a restaurant is not just about
4:38the money you spend at the restaurant.
4:40It's also about the benefit that you
4:42would have been uh be able to get from
4:46going to the gym that you let go. So the
4:48cost of your choice of going to the
4:51restaurant, hang out with your friends
4:54is um the cost of going to the
4:57restaurant and also the benefit of the
4:59second best option that you give up to
5:01do to to be able to choose the first
5:04option.
5:06Principles three, rational people think
5:09at the margin. What does it mean? So
5:12rational people when we are making wise
5:15decisions where systematically and
5:17purposefully do the best um where we can
5:21achieve our goals given the available
5:23opportunities when people are rational
5:26when they're making decisions they're
5:28evaluating cost and benefits of the
5:31marginal changes or thinking about the
5:34like you know maybe the last part of
5:37this like you know when we're making
5:38decisions in terms of for example uh
5:41what we're going to do like you know um
5:44um like like let's use an example of
5:46like you know eating a pizza. Okay, if
5:49you're eating a pizza uh when you first
5:51when you eat the first slice you might
5:53feel pretty good and by the time you get
5:55to the fifth slice it might feel like
5:59you know I'm really full I can't eat the
6:01fifth slice even when pizza is really
6:03yummy. So the fifth slice that is your
6:07marginal change because you already eat
6:09the you already ate the previous four
6:11slice and people are thinking at the
6:13margin in terms of do I eat the number
6:16five the fifth slide or not slice or
6:19not. Um because that's how people
6:22rational people are thinking. They're
6:23thinking at the margin. They're thinking
6:25about the changes the fifth slice of
6:28pizza is going to do to your body or to
6:30your happiness or to your satisfaction.
6:33Um that's how like rational people
6:35think. We're thinking at the margin.
6:39Principle four is very easy to
6:41understand. People respond to
6:42incentives. Incentive is something that
6:45induces a person to act. It could be
6:48good or it could be bad. And people
6:51would respond to incent incentives. For
6:53example, you know, we can't break the
6:56law because if you break the law, you
6:58get caught, then there's consequences,
7:00right? However, if something goes on
7:04sale, you know the price is lower and
7:07then that's also an incentive to push
7:10people to act because it's a positive
7:12incentive. Okay.
7:16So, moving on from how people make
7:19decisions, we're going to look at how
7:21people interact with each other. So,
7:23we're looking at principle five, six,
7:25and seven. We have three principles
7:28here. Okay. Principle five is about um
7:32trade can make everybody better off.
7:35Okay, trade can make everybody better
7:37off. Nowadays, nobody's living in their
7:40own bubble. They would have to trade
7:42with other people. Think about if you
7:44have to produce or make everything on
7:47your own. What are you really able to
7:49make? I know at least I know I don't
7:52know how to build my computers. I
7:54wouldn't know how to make my clothes.
7:57And there's very limited things I would
7:59be able to do by myself. So trade makes
8:02everyone better off. And trade also
8:05allows everyone to specialize in the
8:08activities they do best. Okay.
8:11So I'm naturally not the best at solving
8:15IT problems for example, but um I
8:19understand business quite well quite
8:22well. So, I'm here to teach students
8:24about businesses, about like, you know,
8:26how to run a business, about economics,
8:28right? Um, and I'm using my knowledge to
8:32trade for somebody else to help me with
8:34the IT problem because I'm able to allow
8:37somebody who's able to do that better to
8:40specialize in that activity.
8:43Principle six, markets are usually a
8:46good way to organize economic
8:48activities. There are several parts of
8:50that, but we're going to just like, you
8:52know, really quickly talk about Adam
8:54Smith's invisible hand. This is a
8:56concept we've all heard of. So,
8:58basically, prices adjust to guide market
9:02participants to reach outcomes that
9:04often maximize the well-being of society
9:09as a whole. So, there's an invisible
9:12hand that we cannot see in the market
9:14that's guiding the activities in the
9:16market. So usually the market is able to
9:20regulate itself to adjust prices and to
9:24guide people's behaviors to reach the
9:27best outcome possible.
9:31Principle seven, government can
9:33sometimes improve market outcomes.
9:36There's several reasons why but uh one
9:39of the reasons is uh that we're looking
9:41at here is for example government would
9:44promote efficiency and try to avoid
9:47market failures. Why would a market
9:49failure happen? There are usually two
9:52main reasons. One is externality. I'm
9:54not going to go into concept but
9:56basically it's about how uh your
9:59production or cons consumption of a good
10:02or a service how that might affect
10:05bystanders. So example here given its
10:07pollution. So when companies are
10:10producing maybe they're producing in the
10:12maximum way to uh increase their profit
10:16but the pollution is negative for people
10:19who are bystanders and those um the
10:22pollution they cause is an externality.
10:25Okay. And a company that's just focusing
10:27on profit is not going to worry about
10:30that. and government can sometimes put
10:32regulations in place to promote
10:35efficiency, reduce pollution and promote
10:38uh efficiency.
10:40Sometimes there are market powers when
10:42there's a single buyer or seller for
10:44example that um when we have a monopoly
10:47there's only one company providing the
10:51all the goods within a specific market
10:54and that single seller is able to make a
10:57lot of decisions in terms of how much
11:00they can sell the products or they're
11:02dominating the entire market of a
11:04certain product. In that case the
11:06government would also come in to um
11:10provide regulations to provide laws to
11:12make sure they are um providing their
11:15services or goods um to the public in a
11:19good way. Okay. So that's another way to
11:22um to reduce to reduce some of the
11:26market failures.
11:32Let's skip that one. But um last part
11:35we're going to look at how the econ
11:37economy would function as a whole. Now
11:40we have three more principles. We're not
11:42going to go into details of each one of
11:45them. We're just going to look at this
11:46slide. Okay. So principle eight is about
11:50how a country's standard of living
11:52depends on its ability to produce goods
11:55and services. So we're looking at
11:57productivity here. That's why there are
11:59certain countries that are richer, some
12:01countries that are not as rich, like you
12:04know, pretty soon we're going to look at
12:05GDP and you're going to have a good
12:07understanding of that as well. Principle
12:09nine is about prices rise when the
12:12government prints too much money. And in
12:14one of the chapters um in
12:16macroeconomics, we're going to learn
12:18about inflation. Inflation is almost
12:21always caused by u government printing
12:24too much money and um the prices will go
12:27up. that will cause inflation.
12:30Related to that, if that's really bad,
12:33why is the government still printing so
12:35much money, right? So, principle 10 is
12:37about short-term tradeoffs. So, society
12:41sometimes face um short-term trade-offs
12:44be between inflation and unemployment.
12:47And that's something we're going to look
12:48at more um in macroeconomics as well. So
12:52these three super important to
12:54understand but we're not going to go
12:56into details today because we're going
12:58to learn a whole lot about these like
13:01you know in macroeconomics.
13:04After this we're going to move into
13:06supply demand and market equilibrium.
13:09Okay. So if you've taken microeconomics
13:13you know these are super important
13:14concepts that you used again and again
13:17and again and again and again in
13:19microeconomics.
13:21In macro you will still face the same
13:23concept but um it's not the same kind
13:28like depth as how we talked about supply
13:31and demand uh in microeconomics. So in a
13:35way it's we're going in a different
13:36direction but sometimes you might still
13:39see the graph but it's not like you know
13:42as indepth as how we were looking at it
13:45in um in micro for the most part. for
13:48the most part, but it's still very
13:50important to refresh our memories in
13:52terms of what is supply and what is
13:54demand and what is market equilibrium.
13:56So, we're not going to go too much into
13:58details, but we'll just talk about
14:00supply, talk about demand, and once we
14:03reach market equilibrium, that's where
14:05we stop. Okay? So, that's enough
14:08refresher for now, and then we can move
14:09into our like, you know, um concepts for
14:12macro.
14:16So we're going to start with demand. So
14:19what is demand? Demand is buyer's
14:22desire. So they want to and also their
14:25ability to purchase a specific quantity
14:27of a good or service at various prices.
14:31So their desire and ability to purchase
14:34specific quantity of a good or service
14:37at various prices. So what is quantity
14:40demanded? Quantity demand is amount of a
14:43good that buyers are willing and able to
14:46purchase. Okay, so we're going to look
14:49at a very specific example. And if
14:52you've taken my micro, you know I like
14:54to use unicorns as examples. So here's
14:58our example. It's uticus demand for
15:00unicorn eggs. Okay, demand for unicorn
15:03eggs. So um why we're using unicorns as
15:08an example? Because when you're thinking
15:10about supply and demand, it's simplified
15:12in a way that you would have to be able
15:14to accept its kind of prerequisites and
15:16assumptions. Once you are able to accept
15:19their assumptions, it's a lot easier to
15:21understand. However, these assumptions
15:23are harder to make when you are looking
15:25at a real product, even when they're
15:27generic enough like bread or eggs. So
15:31that's why sometimes I like to use these
15:33fake examples because they don't exist
15:35in reality. You would have to take my
15:38assumptions as they're given.
15:41So, in the magical city of Udica, people
15:43have discovered something amazing.
15:46Unicorns lay tiny glowing eggs that can
15:49hatch into baby unicorns. So, we have
15:52two assumptions here. Assumption one is
15:55all unicorn eggs are identical. Okay? No
15:58matter where you're buying them from, no
16:00matter like you know which day, like you
16:03know which week you're buying them, all
16:05of these unicorn eggs are exactly
16:07identical. Assumption two is that
16:10people's willingness to pay is
16:12different. Some people might be willing
16:14to pay more, some people might be
16:15willing to um pay less. It's same as any
16:18other product we see in the market,
16:21right?
16:22So our assumption three is that the only
16:26thing that's changing here is a price.
16:28Everything else would remain the same.
16:31Everything else remain constant. So um
16:33people's like you know assumptions about
16:36people's ideas about uh unicorn eggs are
16:39not changing like you know um
16:43like you know um whether like you know
16:46the number of buyers are not changing.
16:48The only thing that's changing here is
16:50price. price is going up and down, but
16:52everything else is like almost like
16:54they're frozen in time. Everything else
16:57will remain constant. Now, with with
17:00these three assumptions in mind, we're
17:03going to look at like, you know, a
17:05demand schedule. So, this part here is a
17:08demand schedule for Udica's unicorn
17:10eggs. Okay? So, it's a table that shows
17:13the relationship between the price of a
17:15good and the quantity demanded. So when
17:18the unicorn eggs are being sold at $0,
17:21there are 30,000s of these unicorn eggs
17:24demanded. Okay, when the price goes up
17:27to $5, the quantity decreases and price
17:31keep going up and the quantity demanded
17:33keeps decreasing, right? So the more
17:36expensive something is, the less like
17:38you know likely people are going to want
17:40to buy them if they're exactly the same
17:42product.
17:45Now, we're going to look at this graph
17:47and we want to use this demand schedule
17:51to visualize them to put them in the
17:53coordinate system so we can see the
17:56relationships between price and quantity
17:59a little bit better. So, how are you
18:01going to do that? First of all, we're
18:02going to look really quickly at the
18:04coordinate system. Okay, if you didn't
18:07already remember this, here's a
18:09coordinate system. Sometimes we'll call
18:10it a coordinate plane as well. And in
18:13mathematics you have the x-axxis and you
18:17then you also have the yaxis right? So
18:19you have the two uh axis here. So the
18:23x-axxis
18:24represents the numbers on the hor
18:27horizontal line and the yaxis and you
18:30will see numbers on this vertical line.
18:32Okay. So the middle dot over here where
18:37my mouse is hovering this is called the
18:40origin. Okay. At the origin, we mark it
18:42at 0 0. The first zero represents a
18:46number on the x- axis and the second
18:48zero represents a number on the y axis.
18:51And then we always use a coordinate pair
18:54like you know we I'm sorry a word
18:57ordered pair to show like you know maybe
19:00a specific dot on this graph. And when
19:03we're looking at supply and demand for
19:05the most part we're not looking at these
19:08all four quadrants. We're just looking
19:10at the um this one on the top right over
19:14here. But essentially, when we're
19:16looking at a supply and demand graph,
19:18we're looking at a coordinate system.
19:22Moving back into our price and uh
19:27different price points for these unic
19:30unicorn eggs and the quantity demanded.
19:32Now, we're going to put them onto a
19:34graph. Okay, so zero um price at $0 it
19:39equals to like you know the the quantity
19:41demand is at 30,000 and the price uh
19:44point at $20 the quantity demand is at
19:46$10,000. So we're going to look at this
19:50graph over here. Okay, in class I would
19:53draw this on the board together but like
19:55you know I just drew this really quickly
19:57on paper to show the um to show the
20:00demand curve over here. So this um pink
20:04line over here is our demand curve.
20:06Okay. So on the y ais is no longer
20:10called the y-axis. So we use a vertical
20:12line to represent price and then we use
20:14a horizontal line to represent the
20:16quantity. Right? So now you have these
20:19dots you can place on this graph. When
20:22the price point is is at zero, okay, the
20:26quantity demanded is at 30k. When the
20:28price point is at $5, the quantity man
20:31is at 25K and then $10 at 20K, $15 at
20:3515K, $20 at 10K. And then once you have
20:40these five dots, you're able to connect
20:43the dots and form your demand curve. As
20:47you can see from the demand curve, the
20:49relationship between the price and the
20:51quantity demanded is negative. meaning
20:54uh when price is higher the quantity
20:56demanded is lower and when the price is
20:59lower the quantity demanded is higher.
21:05So um these are things we already
21:08mentioned the quantity demanded the
21:09particular quantity demanded at a
21:11particular price and the demand curve
21:14itself is a function. It shows the
21:16quantity demanded at each price and the
21:19higher the price the lower the quantity
21:21demanded.
21:23While that is fresh in your memory,
21:25we're going to look at supply. So supply
21:28is like, you know, in terms of the um
21:30the supply curve, the quantity supplied,
21:33their relationship with price is
21:36positive. Think about if you have the
21:38same product, of course, the higher you
21:41can sell the product, if everything else
21:43stay the same and the only thing is
21:45changing the price. The higher the price
21:48you can sell this specific product, the
21:51more product you want to sell, right? So
21:54the higher the price, the higher the
21:55quantity supplied.
21:58And we're coming back to our example in
22:01terms of udica supply for unicorn eggs.
22:07Our assumptions stay the same for the
22:09most part. All unicorn eggs are
22:12identical. And assumption two is that
22:16sellers willingness to sell is different
22:19instead of sellers willingness uh
22:21buyer's willingness to purchase. Okay.
22:26Assumption three is that the only thing
22:29that's changing is price and everything
22:32else will remain constant. Okay. The
22:35only thing that's changing is price and
22:37everything else remains constant. It's
22:39almost like everything else is frozen in
22:41time, right? So the only thing that's
22:43changing here is the price of the
22:45product.
22:48Now after we looked at the demand
22:51schedule, we're looking at the supply
22:53schedule of these unicorn eggs. The
22:55supply schedule is a table that shows a
22:58relationship between the price of a good
23:00and the quantity supplied. Okay? So the
23:02when the price is at zero, like you
23:05know, if you are selling something, you
23:07can sell it for $0. You don't make any
23:09money. The quantity supplied is at zero
23:12as well. Nobody is willing to sell.
23:14However, as price is going up, when
23:17everything else remain constant, when
23:19the price is only thing that is going
23:22up, the quantity supplied is also
23:25increasing as well. So the relationship
23:28here between price and the quantity
23:31supplied is positive.
23:37Going back to our coordinate system, the
23:41graph that we're going to that that we
23:43used already. Now, we're going to put
23:47the quantity supplied based on the
23:50supply schedule and the price onto the
23:53graph as well. Okay.
23:59So here's like you know uh what like you
24:02know what what the graph would look like
24:04if the supply schedule like you know
24:07what you see in terms of the quantity
24:09and the price like you know um the the
24:12relationship between the two if
24:14everything's already reflected on the
24:16graph you will have a supply curve right
24:19here. How do we get here? So when the
24:23price is at zero the quantity is also at
24:26zero. When the price is at five, the
24:29quantity is at 5K. When the price is at
24:3110, the quantity is at 10K. When the
24:34price is at 15, the quantity is at 15K.
24:37When the price is at 20, the quantity is
24:39at 20K. So now you can draw a supply
24:43curve
24:46because supply curve is upward sloping
24:49and demand curve is downward sloping.
24:52They form an X, right?
24:55um these two curves would form an X, the
24:59shape of an X of the letter X, right?
25:02Because of that, there's naturally only
25:06one place where the supply curve and the
25:09demand curve are going to meet each
25:12other. And you guessed it, this one
25:15point has some significance
25:18uh like you know uh significant meaning.
25:21And this point itself where the supply
25:25curve and demand curve meet each other.
25:27This is what we call the equilibrium
25:30point. And on this graph the equilibrium
25:33point is at price point $15 and a
25:37quantity supplied equals quantity lended
25:40at 15,000
25:42units. Okay. So this is what we call the
25:46equilibrium.
25:48Equilibrium
25:50is where the price has reached a point
25:53where quantity supplied equals the
25:56quantity demanded. Okay, so it's a
25:59combination of a price and a quantity.
26:03Equilibrium is important in um economics
26:07because
26:09this is where there's no more upward or
26:12downward movement. Right? So, if we go
26:14back to the graph, let's assume the
26:19price is higher. Let's say the price of
26:22these unicorn eggs are $20 and it's
26:25going to hit the supply curve at 20,000
26:29quantity point and it's going to hit the
26:32demand curve at 10,000 quantity point.
26:35Okay. So, in this case there's higher
26:38number supplied comparing to um the
26:41number demanded. So this is a surplus in
26:44the market. There's extra eggs, extra
26:47like you know unicorn eggs in the
26:48market. However, let's say if we're
26:52offering the unicorn eggs in the market
26:54at $5 per unit, $5 per egg. Now there's
26:59a lot of people asking for the unicorn
27:01eggs, there's 25,000 quantity demanded.
27:05However, only 5,000 of these unicorn
27:08eggs are supplied. Okay? So when there's
27:11a surplus, if there's too much of a
27:13certain good in the product in the in
27:15the market and the sellers want to get
27:17rid of the product, they're going to
27:19decrease the price. As they're
27:21decreasing the price, the quantity um
27:25demand is is going to increase and
27:27eventually they're going to meet at the
27:30equilibrium point.
27:33when the price is market um too marketed
27:36too low for a product and there's too
27:39much demand and not enough supply. So
27:41more sellers will enter the park market
27:44or some of the sellers who w would want
27:46to sell more of the same product. Then
27:50um the quantity supplied is going to
27:52increase
27:54along the supply curve and as the
27:57quantity supplied is increasing the
27:59price is also increasing and the de
28:01quantity demanded is going to decrease
28:04along the demand curve. When will the
28:07movement stop? when the quantity
28:10supplied and demanded are meeting at one
28:13specific point and that is the
28:15equilibrium.
28:19So last part of this video the law of
28:22supply and demand which is super
28:24important. Um the law of supply demand
28:26is a price of any good adjust to bring
28:29the quantity supplied and the quantity
28:31demanded of into balance. Once the
28:35market reaches the equilibrium point,
28:37there's no further upward or downward
28:40movement anymore on the market. Okay.
28:44So, uh we're going to see the uh supply
28:47and demand curves in macronomics as
28:50well, but not not the same kind like you
28:55know intensity as what you see in micro.
28:58Okay. However, it's still very important
29:00to review these um concepts. This will
29:03guide you and help you um understand
29:06macroeconomics better.

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