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

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

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

12: it's probably these strawberries, right?

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

15: Adriene: But, strawberries are great.

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

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

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

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

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

36: [Theme Music] Markets

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

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

54: willingly decide to make a transaction.

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

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

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

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

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

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

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

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

92: more than the $10 an hour she pays him.

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

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

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

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

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

114: our scarce resources towards their most efficient use.

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

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

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

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

132: will have an incentive to produce more, which then drives down the price. That's like magic except it's not.

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

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

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

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

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

155: better off without making something that makes buyers better off.

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

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

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

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

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

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

181: every dollar that is spent signals to producers what should be produced and how it should be produced. Supply and Demand

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

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

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

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

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

206: on the Y axis, we have the price of strawberries, down here on the X axis we have the quantity of boxes of strawberries.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

273: The price is called the equilibrium price, and the quantity is called the equilibrium quantity. Price and Quantity

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

281: $3; sometimes it goes up to $6, and at Whole Foods, local, artisanally grown strawberries,

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

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

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

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

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

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

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

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

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

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

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

337: that can happen in a market.

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

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

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

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

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

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

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

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

376: The market's spoken. Strawberries are so over.

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

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

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

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

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

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

403: prices and because sometimes, it explodes: gasoline.

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

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

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

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

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

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

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

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

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

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

447: [Phone rings]

448: 911, what's your emergency?

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

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

456: Mr. Clifford: They're all melted!

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

537: can't solve all our problems Sometimes, they need to be regulated, and sometimes, they should be avoided.

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

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

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

558: law, like the law of gravity.

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

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

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

569: reliant on humans acting as buyers and sellers.

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

576: gravity, no matter how much we might want to.

579: Mr. Clifford: Whoa.

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

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

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

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

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

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

603: forever. Thanks for watching. DFTBA.