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Mr. Clifford: I'm Mr. Clifford... and this
is Adriene Hill, welcome to Crash Course economics.

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Let's start by talking about something that
most people take for granted.

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Adriene: Is it grocery stores, is it the census,
is it GPS, is it goldfish, is it frogs? Oh,

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it's probably these strawberries, right?

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Mr. Clifford: No, I was gonna say markets.

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Adriene: But, strawberries are great.

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Mr. Clifford: Yeah, but where do you think
strawberries came from?

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Adriene: The ground, the farmer, the market,
the grocery store, the miracle of life?

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Mr. Clifford: Now look around you. Where did
all that stuff come from? And who made it?

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And why? Well, the answer is simple, but it's
underrated. It's markets, and for most of

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us farms and factories and stores, but mainly
it's just markets. Can I have a strawberry

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now?

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[Intro]

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Adriene: So a market is any place where buyers
and sellers meet to exchange goods and services.

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The key to markets is the concept of voluntary
exchange. That is, that buyers and sellers

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willingly decide to make a transaction.

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Let's say you go to a farmer's market and
you buy a box of strawberries for $3. You

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value the box of strawberries more than the
$3 you gave up to get it. The seller valued

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the $3 more than the box of strawberries.
The transaction's a win-win because you got

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your strawberries and the farmer got his money.
You both felt better off; that's voluntary

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exchange.

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This same process happens in the labor market.
Say that instead of the farmer's market, you

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bought your strawberries at your local supermarket.
The cashier voluntarily decided to work there.

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He values the $10 an hour he makes there more
than he does sitting at home watching the

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Walking Dead. At the same time, the owner
of the store values the labor of the cashier

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more than the $10 an hour she pays him.

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And so it goes, on and on, all the way up
the chain of production, from the driver that

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delivered the strawberries to the farmer that
grew the strawberries to the tractor that

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the farmer purchased. The point is that markets
are everywhere and most are based on voluntary

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exchange.

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Mr. Clifford: The part of all this that most
people take for granted is how efficient the

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system is. Competitive markets turn out to
be pretty great about allocating or distributing

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our scarce resources towards their most efficient
use.

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So if farmers produce, like, too many strawberries,
then the price will fall as sellers try to

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sell them off. Lower prices means less profit
for the strawberry farmers, and those farmers

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will have an incentive to produce something
else like lettuce or Brussels sprouts. So

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if farmers don't produce enough strawberries,
buyers will bid up the price and the farmers

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will have an incentive to produce more, which
then drives down the price. That's like magic

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except it's not.

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The information that markets generate to guide
a distribution of resources is what economists

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call price signals. Markets also incentivize
the production of high-quality products. If

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the strawberries are brown and nasty then
no one's gonna want to buy them, and if the

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tractor's a piece of junk, the strawberry
farmer's gonna tell other farmers to buy some

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other tractor.

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Now, ideally the eventual result of voluntary
exchange is that sellers can't make themselves

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better off without making something that makes
buyers better off.

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Businesses, and in particular large corporations,
are often villainized as greedy, heartless

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institutions that take advantage of consumers,
but if markets are transparent and buyers

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are free to choose, then businesses will have
a hard time taking advantage of people.

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Now obviously greed and deception happen in
real life, and there are situations where

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consumers don't have a choice, but for the
most part, if you really don't like the policies

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or practices of a particular company, then
don't shop there. After all, in the free market,

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every dollar that is spent signals to producers
what should be produced and how it should

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be produced.

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Adriene: We've established that prices and
profit determine where resources should go,

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but where do prices come from? Who determines
the price of my box of strawberries? To answer

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that, we're gonna draw - get ready for it
- supply and demand. Let's go to the runway.

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Mr. Clifford: If there's only one thing you
should learn in economics, it's supply and

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demand. Let's use the market for strawberries
to help us understand this concept. Up here

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on the Y axis, we have the price of strawberries,
down here on the X axis we have the quantity

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of boxes of strawberries.

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Let's start by looking at buyers and how they
respond to a change in price. If the price

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goes up for strawberries, then some buyers
will go buy blueberries or they'll go on that

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all bacon diet. The point is, they're gonna
buy less strawberries. And if the price goes

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down for strawberries, then people are gonna
buy more. This is called the law of demand:

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when the price goes up, people buy less, when
the price goes down, people buy more. On the

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graph it's show by a downward sloping demand
curve.

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Now let's think about sellers like the farmer
in the farmer's market. If the price of strawberries

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go up, then that farmer will make more profit,
so will have an incentive to produce more

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strawberries. If the price goes down then
he's not gonna want to produce strawberries.

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That's called the law of supply, and on the
graph it's shown by an upward sloping supply

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curve.

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Now let's put supply and demand together.
If the price is really high at $10 then producers

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would like to produce a lot of strawberries,
but consumers won't want to buy them. This

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mismatch is called a surplus. And if the price
goes down for strawberries, let's say down

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to $1, then buyers want to buy a whole lot,
but producers won't have incentive and they'll

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produce very little. At the end you have mismatch,
but this one's called a shortage.

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And there's only one price where the quantity
that buyers want to buy is exactly equal to

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the quantity that sellers want to sell, and
it's right here where supply equals demand.

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The price is called the equilibrium price,
and the quantity is called the equilibrium

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quantity.

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Adriene: Okay, sure your graph makes sense,
but the price of strawberries isn't always

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$3; sometimes it goes up to $6, and at Whole
Foods, local, artisanally grown strawberries,

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the fancy fancy strawberries, can cost upwards
of $12. But I guess Whole Foods is a whole

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other world where price has nothing to do
with realistic economics. We'll stick to normal

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strawberries. In fact, the prices for all
sort of stuff change all the time.

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External forces can shift both the supply
and demand curves, changing the equilibrium

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price and quantity. For example, let's assume
that this graph shows the demand and supply

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of strawberries in the summer. What happens
in the winter? Will the change in weather

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affect buyers' demand? Or producers supply?
Spoiler alert: it's supply. Colder temperatures

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make it harder to grow strawberries. The result
is the entire supply curve is gonna shift

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to the left.

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This is because at all possible prices, there'd
be fewer strawberries produced. That's it.

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This graph is just a tool that economists
and everyone else used to show the results

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of a change in a market. I know it seems complicated
at first, but there are really only four things

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that can happen in a market.

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Supply can decrease, supply can increase,
demand can decrease, or demand can increase.

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Some people might wanna talk about a price
being fair or right. Well, that all depends

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on your point of view. The buyer always considers
a low price to be a very fair price, while

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the seller considers it unfair and vice versa.
In general, economists don't really like to

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push opinions about prices. Voluntary exchange
suggests that the price is there for a reason.

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For example, assume the demand for strawberries
inexplicably falls, so the demand curve shifts

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to the left and the equilibrium price and
quantity fall. Farmers might go to the government

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for assistance, but most economists would
argue there's no reason to bail them out.

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The market's spoken. Strawberries are so over.

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Furthermore, if the government helps the farmers
by giving them a subsidy, it would be putting

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resources towards something that society doesn't
value. That would be inefficient. Luckily,

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every reasonable person on Earth values strawberries,
so they continue to get produced.

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Mr. Clifford: Now, the downside is, the supply
and demand model only applies to analyzing

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strawberries. Nah, I'm just joking; it applies
to all sorts of stuff. In fact, let's look

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at a market for a commodity known for its
volatility, both because of its fluctuating

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prices and because sometimes, it explodes:
gasoline.

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Now when you see gas prices are moving all
over the board, that's just demand and supply.

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For example, in 2014, the retail gas price
in the United States fell dramatically. Why?

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Well, it was demand and supply. The economies
of both Europe and China weakened, which decreased

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the demand for gasoline, shifting the demand
curve to the left. At the same time, new fracking

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technology and restored production of oil
in Iraq and Libya caused the supply of gasoline

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to increase, or shift to the right. The combination
drove gas prices down by more than 40% per

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gallon. And that's it. Now you can tell all
your friends you understand supply and demand.

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It's a big day for you. It's a big day.

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Adrienne: So markets and supply and demand
are awesome. But sometimes, they're not awesome.

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For example, we don't wanna use the market
approach when it comes to firefighters.

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[Phone rings]

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911, what's your emergency?

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Mr. Clifford: My house is on fire, how much
do you charge to put it out?

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Adrienne: It'll be $10,000, what's your credit
card number?

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Mr. Clifford: They're all melted!

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Adrienne: [hangs up] Okay, that one's obvious,
but what about the market for human organs?

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After all, there's a huge shortage, and thousands
of people die each year waiting for transplants.

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Should there be a competitive market for human
kidneys? A free marketeer would say sure,

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why not? If a donor wants $15,000 more than
he wants his other kidney, why stop him?

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Mr. Clifford: Well. Ethics. I mean, there's
several problems that arise with an unregulated

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market for human kidneys. First is the moral
question, is it fair for a poor person who

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can't afford a kidney to die while a rich
person lives? Well, probably...no, not at

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all. Another problem results in the law of
supply. When there's an increase in the price

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of kidneys, there's an incentive for people
to steal and sell kidneys. In fact, the World

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Health Organization has stated, "Payment for
organs is likely to take unfair advantage

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of the poorest and most vulnerable groups,
undermines altruistic donations, and leads

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to profiteering and human trafficking. I mean,
all bad things. Now, that being said, why

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do 70% of American economic association members
support some kind of payment for organ donors?

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Adrienne: Well, it's because you can solve
some of these problems with a market approach,

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but the market must be regulated. Often family
and friends are willing to donate a kidney,

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but they're not a match for the patient. Economists
generally support creating kidney exchanges,

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where pairs of willing donors are matched
with strangers that agree to donate to each

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others' loved ones. In both cases, the supply
of donated kidneys would increase, which would

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alleviate some of the shortage. Like we've
said before, free markets are awesome, but

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they can't solve all our problems Sometimes,
they need to be regulated, and sometimes,

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they should be avoided.

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So there you have what, for most people, is
the start and for many, the end of economics.

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Supply and demand. Economists and politicians
often like to refer to the interaction of

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supply and demand as laws, and we've done
that too, but to be clear, it's not an absolute

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law, like the law of gravity.

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Mr. Clifford: As we've tried to point out
here on Crash Course, economics is about human

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choices and their consequences. Even though
supply and demand behave in a predictable

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way that we've seen in the models, we can't
lose sight of the fact that both of them are

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reliant on humans acting as buyers and sellers.

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Adrienne: Our actions influence supply and
demand in a way that they can't influence

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gravity, no matter how much we might want
to.

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Mr. Clifford: Whoa.

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Adrienne: That's After Effects. And that's
something to keep in mind when you hear us

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or anybody talking about economic laws. Thanks
for watching. We'll see you next time.

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Mr. Clifford: Thanks for watching Crash Course
Economics, it was made with the help of all

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these nice people . You demanded it, and they
supplied it. Now, if you want them to keep

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supplying it, please head over to Patreon.
It's a voluntary subscription platform that

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allows you to pay whatever you want monthly
to help make Crash Course free for everyone

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00:10:03,450 --> 00:10:05,670
forever. Thanks for watching. DFTBA.