The simulation of Khan Academy Video on changes in the market tries to explain how shifts in demand and supply have an impact on the market equilibrium. Decision making and quantity are some of the examples depicted in the Khan's video. The information presented in this video is related to current professional companies and products in the real world. Each shift in supply or demand is seen to bring an impact on the general equilibrium (Baumol, 2009).
In the simulation, a single rational product is picked to view the principle of microeconomic theory. Assumptions are made when shifts of supply and demand change so as to show that stable preferences are possessed by an individual industry. The product presented in the simulation is apples. Changes in the supply and demand of the apple impact on the equilibrium when it comes to the relation between the prices and the quantity.
The simulation looks at how supply and demand fluctuate or changes based on some factors in the market. It goes ahead to look at the impact this changes in supply and demand have on the equilibrium of the price or the equilibrium of the quantity. An instant where there are an invention and a new disease resistant apple is introduced to the market. The supply of apples will be expected to go up as the quantity of apples will increase because the price of growing them will go down. This will shift the supply curve to the right. This will impact on the equilibrium price which will be lower and thus the prices of the apples will be lower.
In another scenario, word spreads that apples reduce the probability of people get cancer. The customer preference to apples will increase thus the demand for the product will go up. This will cause the demand curve to shift to the right due to increase demand of apples. The price will also go up because of the result of the equilibrium price going up. The quantity equilibrium in this scenario goes down.
Microeconomics is the study of individual units of the economic behavior of an economy (for example a household, person, industry or firm) and not of the aggregate economy. Its primary concern is the impact it has on economic choices made by individuals, how their decisions are coordinated by existing markets, and how demand and prices are determined by this individual markets (Baumol, 2009). This is seen in the above apple scenarios given. Macroeconomics focuses on economics as a whole. It looks and considers inflation problems, business cycles, unemployment and growth.
The law of supply and the law of demand are the two most important principles that economists use. In the law of supply when the price of a product goes up, the quantity of that product also supplied increases (Deepashree, 2013). When the price of a product decreases, the quantity of that product also supplied decreases. It should be noted that this is true if all other factors remain equal. The law of demand states that the price of a good is inversely proportional to its quantity demand and all other factors remain equal. This means that if the price of a product goes increases, the quantity of that product being demanded will decrease.
The simulation also tries to show how the change of consumer preference has an impact on these two principles. In maybe a different example that isn't in the simulation. If customers desire for corn suddenly increases. This change in choice and taste may be due to an effective advertising campaign, maybe a health study showing the advantages of corn, or alternative grain products such as wheat being more expensive. Regardless of what reason is influencing consumers, the increase in the demand of corn will result in a greater corn quantity being demanded at specific price levels.
In the above graph, D0 is representing the initial demand curve, while D1 is representing the new demand curve. It can be observed that at a given price level, such as four dollars, the demand for quantity goes from three million to five. In a case where something happens and the good quantity being supplied changes at many specific price levels, the quantity willing to be provided by suppliers will increase as diagrammed below.
Demand curve shift as learnt from the simulation are caused by the following factors:
Income change – if there is an increase in the consumer income then it is expected that the demand for products to increase.
Change in tastes and preferences – if a product becomes liked more, then the quantity being demanded will go up and if it is less liked less its demand will decrease.
Change in products that are seen to be complimentary – if the gasoline prices increase, the demand curve will shift downward for large SUV's.
Change of substitute prices – if the price of beef increases, demand for pork will likely go up.
Advertising – a good advertising campaign will probably increase the demand for that specific product and also decrease the demand for any other competing product.
Shifting of market demographics
Income distribution – for example, if the poor get poorer, and the rich get richer, the demand for luxury products will go up.
Factors that would cause the supply curve shifting may include:
Cost – if crude oil costs go up for a plastic manufacturer it would cause a left and up sift of the supply curve. Technology changes can decrease the costs dramatically.
Tax policy of the government – if business taxes go up the impact on the shift of the supply curve will be to the left and up. If producers have a government subsidy, then suppliers will increase and be more available thus a down and to the right shift of the supply curve.
Climate/ weather – agricultural products are the ones that their supply will be influenced by climate and weather.
Prices of substitutes – if farmers grow corn instead of wheat, and the costs of corn increases, then the wheat supply curve will shift to the left and up as more farmers move from growing wheat to corn.
The number producer – more supply is expected to be available as the number of individuals or firms producing a product go up.
Price elasticity of demand is a measure of the extent of responsiveness of demand for a service or good to price changes. Price elasticity of demand is calculated by dividing the percentage change in quantity demanded to the percentage price change (Mankiw, 1998). The simulation shows how a small price change, when accompanied by large changes in quantity, demanded the product becomes elastic. It also shows how a product is inelastic if a large price change is accompanied by a small change in the quantity amount demanded.
References
Baumol, W. J., & Blinder, A. S. (2009). Economics: Principles and Policy. Mason, OH: South-Western/Cengage Learning.
Deepashree, . (2013). General economics: For CA Common Proficiency Test (CPT). New Delhi: McGraw Hill Education (India.
Mankiw, N. G. (1998). Principles of microeconomics. Fort Worth [u.a.: The Dryden Press.
