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– [Narrator] We know from previous lessons
that the demand curve and the supply curve show
how buyers and sellers respectively respond to changes in the price of a good.
In this lesson, we’ll show you how the interactions
of buyers and sellers determine the price.
Let’s start with the punch line.
The equilibrium price is the price
where the quantity demanded is equal to the quantity supplied, right here,
and this is the equilibrium quantity.
Why is this the equilibrium price?
At any other price,
forces are put into play
that will push the price towards the equilibrium price.
It’s kind of like a ball in a bowl,
where the ball always returns to one stable position.
The equilibrium price is the only place
where the price is stable.
To see why, the first thing to understand is
that buyers don’t compete against sellers.
Buyers compete against other buyers.
A buyer obtains goods by bidding higher than other buyers.
And sellers compete against other sellers
by offering to sell at lower prices.
Think about it — at an auction,
the buyer with the highest bid gets the item,
and the seller with the lowest price makes the sale.
So let’s say the price of oil is currently 50 bucks a barrel —
that’s above the equilibrium price of $30 a barrel.
At $50, the quantity supplied ismore than the quantity demanded
so we say there is a surplus.
So what happens? It’s sale time! [party noisemakers]
When there’s a surplus, sellers can’t sell as much
as they would like to at the going price
so sellers have an incentive to lower their price a little bit
so they could outcompete other sellers and sell more.
The price will continue to fall
until the quantity demanded is equal to the quantity supplied,
and equilibrium is reached.
Now let’s say the price is less than the equilibrium price,
say 15 bucks a barrel.
At 15 bucks a barrel,
the quantity demanded exceeds the quantity supplied, a shortage.
And what happens now?
When there’s a shortage, buyers can’t get as much
of the good as they want at the going price
so they compete to buy more by bidding up the price.
Now since buyers are easy to find,
sellers also have an incentive to raise the price.
The price will continue to rise
until quantity demanded is equal to the quantity supplied
and equilibrium is reached.
At any price other than the equilibrium price,
the incentives of the buyers and sellers push the price towards the equilibrium price.
Only the equilibrium price is stable.
Now let’s take a deeper look at the market equilibrium and some of its properties.
Remember that there are many different users of oil
and many different uses for oil,
每种用途下 石油都有替代品 代用品和价值
each with substitutes, alternatives, and values.
At any specific price of oil,
there’s a group of buyers who value oil enough to demand it at that price.
And as the price changes, so do the buyers and their uses.
On the supply side, at each price on the supply curve,
we’re looking at a group of suppliers whose cost of extraction
is low enough to be profitable at that price.
At the equilibrium price,
these higher value groups are the buyers,
and these lower value groups are the non-buyers.
Also notice that every seller has lower cost
than any of the non-sellers.
Since the buyers with the highest values buy,
and the sellers with the lowest cost sell,
the gain from trade
— the difference between the value a good creates and its cost —
In addition, at the equilibrium quantity,
every trade that can generate value does generate value
up until the very last trade
where the value to buyers is just equal to the cost to sellers.
– [low voice] Yeah!
– [Narrator] In a free market,
there are no unexploited gains from trade,
and there are no wasteful trades.
If the quantity exchanged were greater than the equilibrium quantity, for example,
we would be drilling deep and expensive oil wells
just to produce more rubber duckies, and that would be wasteful.
[嘀咕声] 哦 别这样！
– [whiny voice] Oh no!
– [Narrator] In a free market, buyers and sellers
acting in their own self interest
end up at a price and quantity
that allocates oil to the highest value buyers
produced by the lowest cost sellers
in a way that maximizes the gains from trade —
the sum of the benefits to buyers and sellers.
This is one of the reasons Adam Smith said
that the market process works like an invisible hand
to promote the social good.
– [Narrator] If you want to test yourself, click”Practice Questions.”
Or, if you’re ready to move on, just click”Next Video.”
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