You know when you read or hear a word so many times it starts to seem like something...alien? Well, that’s supply and demand for anyone who’s been anywhere near the field of economics.
Let’s break it down.
Supply is the goods (physical things you can buy) and services (not physical goods, but things you have others do to help you...think: marketing, hairdressers, financial advisers, etc.) that companies and people make. Demand is what goods and services people actually want to buy.
When supply and demand meet, it’s a beautiful thing: exactly the amount of stuff that was made was also bought, and that’s at a certain price that we call the “equilibrium.”
When there’s high demand and low supply, the price of the supply can go up. Because there’s not that much of the good/service and a lot of people want it, prices rise. Think of Uber on a Friday or Saturday night: lots of drunk people who want rides, and not as many Uber drivers to haul their drunken butts around as usual...so prices surge.
When there’s low demand and high supply, suppliers have a surplus. Too much stuff and not enough people to buy it—at least at the normal, equilibrium price.
So how to get people to buy it? Lower the price. Stores like TJ Maxx and Ross are a good example of this: the same stuff is sold to consumers there that it was elsewhere, but at a lower price, because it didn’t sell at the other stores from too much supply.
Supply and demand works the same in macroeconomics, but on a larger scale, which means larger consequences. A low supply of Ubers and a high demand from drunk people who are pissed at the high prices is nothing compared to a low supply of a staple food to an entire country (then the whole country is pissed at the lack of supply and/or higher prices on the little supply available). Likewise, having a surplus is a much bigger deal in macroeconomics.
It’s important to think about how things work internationally, too. For instance, the U.S. subsidizes their farmers. Why? If U.S. farmers were to compete with international farmers, they would quickly disappear from the market, because imported stuff is cheaper. So we subsidize farmers to artificially change the supply situation of food that farmers produce in the U.S., likely because we don’t want to be dependent on other countries for our food, even if it is cheaper.
Related or Semi-related Video
Econ: What is Money Supply?4 Views
And finance Allah Shmoop What is the money supply the
money supply Well it's the supply of money Yeah Thank
you everyone Good night All right We'll go to a
bit more detail here first Let's define the money Part
of the money supply will Money is the liquid financial
stuff moving around the economy And it's also all those
coins back Your couch Yeah it's liquid money And no
we don't mean liquid like these things We mean liquid
like these things Yeah Ching Well money is cash no
bills and coins and easily liquid lee sellable financial instruments
that can get turned into cash very easily So what's
money again Well the seven bucks you have in your
wallet it's the sixty eight cents in change in that
couch cushion right there Yeah along with a gun And
it's one hundred twelve dollars Forty five cents in your
Bank of America checking account Yeah that's counted his money
to its liquid You could just sign a piece paper
put the numbers on it and turns into catch value
due right away So that's what we called money is
in money supply We add up the stuff and everyone's
while in their one's couch cushions Everyone's banking accounts and
plus a few other types of accounts that quickly get
turned into cash like money market accounts at a brokerage
stuff like that And you've got the money supply in
the economy That's it Well there are a few different
measures of the money supply M one m two an
m three sounds like a list of promotional James Bond
bosses But no they're different That's different him Their economic
statistics put together by the Federal Reserve to track the
size of the money supply helps them kind of think
about what policies they want to implement We'll em One
is the most narrow definition It only includes the amount
of currency in circulation plus things that can get turned
into currency almost instantly You know stuff like traveler's checks
and the money and checking accounts Stuff like that Well
em to then includes all the stuff in M one
plus the money and things like savings accounts And while
some money market accounts that kind of stuff then we
have M three but includes all the above stuff plus
some long term deposits like you commit to putting five
grand and your savings account of Bank of America You
can't withdraw it early or you pay a big penalty
So that's kind of a long term deposit You get
a little bit more interest in return for being ill
liquid for six months So all those numbers those dollars
are included an M three But well guess what It
got expensive to track him three And now they're federal
Cut the budget and Fed just doesn't track him three
anymore Over time the Fed noticed that money supply measures
really didn't relate a strongly to economic performance as they
once did like thirty forty fifty years ago Well the
process started in the eighties and by two thousand six
the Fed decided that tracking M three as well you
know more trouble than it was worth Well the feds
still tracks and wanting him to though uses those stats
less and less than it used to mean ing away
back in the twentieth century for making policy decisions Yeah
anyway in two thousand eighteen M one set at about
three point seven trillion dollars an M to it about
thirteen point nine trillion noticed How much bigger M too
is an M one Okay so that's the money part
of money supply But what about the supply concept here
Well the basic concepts of economics are all about supply
and demand Right But when we think of supplying the
man we think of the supply and demand of a
product There's only so much triple ripple chocolate peanut butter
ice cream in the world that's supply or the supply
of it Four hundred ninety two million pounds That's it
Well there are many people who think it's the best
flavor and want to eat it by the gallon That's
demand Those air people are willing to pay four bucks
a gallon for it or whatever cost not supply then
meets the man How do you dio and you get
a price But notice something about that price That price
here Well it's given in money There's a second supply
situation going on in any price The money supply You
know how your great grand parents will say things like
when I was your age and ice cream cone cost
a quarter It's not that they used to eat little
itty bitty tiny ice cream cones Things used to cost
less at least in nominal terms like it took less
cash to get stuff fewer pennies like back then Penny's
actually matter And that didn't have anything to do with
the supply or demand for ice cream It had to
do with the supply of money For as long as
most people can remember while things have been steadily getting
more expensive right or at least more dollars to buy
stuff that's inflation The value of a unit of money
like the dollar has gone down because well there are
more of them more units of money floating around making
things more expensive more supply of money Things cost more
in terms of the amount of dollars But we also
earn Mohr you know in terms of the amount of
dollars right Like a good wage a hundred years ago
was like a dollar an hour maybe a dollar a
day and today it's like a dollar a minute Go
to see your dentist Been there done that Well that's
why when you compare prices or wages with the past
you have to use an inflation adjusted figure right You
want to measure the buying power of a particular dollar
otherwise things in the past always looked really cheap right
Like we might talk about things in nineteen seventy two
dollars Yes we're kind of anchoring the notion of the
money supply itself Released how valued that money was alright
Recap time Money supplies the amount of cash in an
economy along with certain financial instruments and accounts that get
turned into cash pretty easily The Fed measures money supply
of U S dollars using m one m two They
used to have a thing called them three but no
BMWs driving that around now And the money supply comes
into play in the way prices air set When buying
something you have the supply and demand dynamics of the
product you're looking to buy But you also have the
amount of available money Yeah which goes into the price
of things as well That's it Enjoy your fudge ripple
there Well count coins
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