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Foreign. Principles of Economics. My complete guide to Understanding Economics is now available in hardcover, audiobook and ebook from seifeddin.com, amazon and many more booksellers worldwide. And now I am also teaching a course based on this book on my website seyfeddin.com Principles of Economics will run the whole academic year from September to June and will have a new lecture every two weeks, as well as weekly live online discussion seminars open to learners from all over the world and from all walks of life. Whether you're a student, a professional, or a retiree, you are making economic decisions every day and this course will arm you with the wisdom of centuries of economists to improve your economic decision making. You'll also get a free book of Principles of Economics. If you sign up for the course, go to seifedin.com and sign up now. Hello and welcome to Lecture 11 of the Principles of Economics online course on seifedin.com Today's lecture's topic is markets. So in the previous lecture we introduced money. We explained money as a tool of economizing and as an emergent order that happens in a market economy. As people seek to trade with one another, to divide labor between one another, money emerges as a solution to the problem of coincidence, of wants, and money tends toward becoming one. We always tend toward having only one money, and when we tend toward having one money, that means more and more people can engage in trade with one another because the problem of coincidence, of wants, gets solved, and so people aren't required to think about what it is that the person they're trading with wants wants in return because they know that almost everybody accepts the same money. And so therefore you can exchange goods with people all the time while simply just giving them the things that everybody wants, which is money. So with the deployment of money, it becomes possible to engage in specialization, division of labor, and capital accumulation at a much larger scale. The emergent outcome is a market economy. What we refer to as a market economy is a social order in which people are able to cooperate in very large numbers on economic production, providing goods and services for one another to the benefit of all involved voluntarily, without a coercive authority dictating and coordinating their actions. It's something that is inextricably linked to money. We're only able to have a market because we have money, because without money, markets cannot grow because the problem of coincidence ones prevents trading at a large scale, prevents trading to emerge between people who don't have relationships with one another, prevents people from being able to specialize heavily so on one extreme, you can provide for yourself and live a precarious existence, seeking the basics every day. Imagine if you're living in isolation from the world, trying to make ends meet. Every day is a challenge. Every day is a fight for survival. On the other extreme, you can be part of a market economy where you are collaborating with approximately 8 billion people, which is the population of the world today, where you only specialize in producing the thing you are the most productive at and you obtain everything else by trading with others. Think of these two as being the absolute extremes and it helps you understand why. Everybody wants to be part of a market, or almost everybody chooses to be part of a market economy. Even the people who don't think of themselves as being fans of a market economy, who don't like to be fans of the market economy, still pay it the ultimate compliment by benefiting from its outcomes. Because just compare the state of somebody who's able to specialize on producing one tiny little thing, one small economic good that you are able to make, and you make very good because you make very well because you specialize in it, and then trade that for money, and then use that money to buy everything that you want. That allows you to have a much better standard of living than somebody who's trying to make everything for themselves on their own. So I've mentioned this before and I keep mentioning it again throughout this class because I believe it's very important concept. Imagine what your life would be like if you tried to live on your own. Imagine how precarious your existence would be. The second option, being part of a market economy is superior by any measure. There's no evil conspiracy to get you to be part of a market economy. You choose it every day because of its benefits. Everybody is compelled by economic reality to cooperate with others, not because people put a gun to their head and ask them and force them to cooperate. The productivity of labor in a market economy is infinitely higher than in isolation. And I think a very profound point to understand here is that the capitalist market economy makes people specialize in what they do best and focus on how to provide value for others rather than focusing on what you value yourself. In other words, if you try to live in isolation, you become very self centered because every day you're looking out for yourself and you try to find the things that you need for yourself and you don't care about other people, other people can't help you in your struggle for survival. But if you enter an economy, if you start trading with other people, then suddenly your well being is inextricably linked to the well being of others. Because the way that you are able to provide for yourself is by providing for others. And this is an enormously profound point. It's an enormously important point. Part of what makes markets so important for humanity and the civilizing effect of market economy. And this is why this book is going to now start shifting more and more toward discussing the topic of civilization. Because it's inextricably linked to capitalism and to market economies. Because once you are trading with a market, once you are exchanging goods with other people, you have an incentive to provide those people with what they want and to care for their well being and to care for what they care about. Because the more you're able to satisfy their needs, the more they're able to pay you, which allows you to meet your needs. In other words, your ability to meet your needs in a market economy is contingent upon your ability to meet other people's needs. And that forces you to cooperate with other people. And that forces you to become a peaceful person. And that forces you to become a civilized human being. That's why we get civilization. Civilization is not some giant conspiracy to get us all to like each other. We have to do it, because if we don't do it, we all starve, we all go back into the jungle and we all live a very miserable existence. So markets compel you to work in the service of others rather than yourself. And as it is the best way of meeting your own needs. And you can understand civilization as the structure that we as humans have developed as a way of allowing us to work with each other in a way that is constructive and productive for all of us. People cooperate in a market without coercion, central direction, or social ties to compel them. The motivation for cooperation is self interest. We are self interested, and so we seek to cooperate with others. We don't cooperate with others because we are being virtuous to them. We're not doing it out of altruism. We're doing it for our own good. You get better outcomes in your own life if you're able to cooperate with others. So the motivation is self interest. And the coordination is through economic calculation, performed with one denominator, money. And that's what we're going to be discussing in more detail in the next chapter. What allows us to coordinate activity in a market economy is not that somebody puts a gun to our head and tells us, all right, you do this, you do that, you're good at this, you shouldn't do that that doesn't happen. Everybody's self interested and everybody can perform economic calculation because we have money. Because as we discussed in the last chapter, money, money allows us to put a compare the market price of goods to the valuation that we have for these goods. And therefore we're able to make economic calculation on every decision that we can take and every action that we weigh taking. So every action is calculated against money and against the actor's preferences. So without money, there are no markets. With money we are able to build amazing markets that allow us to become very productive. When prices are all expressed in one. Good individuals compare prices of goods to their subjective valuations and make consumption and production decisions. Now, value cannot be measured. Remember this was one of the key points that we discussed in chapter two, that value is subjective and there is no unit with which we can measure value because there are no constants in human action. But valuation can be ranked ordinally. In other words, you can compare the valuation of different things and you can figure out by asking yourself what you prefer, which one is valued more than the other. So an individual can perform basic economic calculation because all prices are compared to his personal preferences ordinally. So simply by being able to ordinally arrange different options, we're able to perform economic calculation on different courses of actions. And therefore we're able to arrive at the course of action that is most suitable for meeting our ends. So everybody does this, everybody's performing economic calculation and therefore everybody makes the market decisions that. Now for a quick word from our sponsors. With fiat money constantly debasing, preserving your wealth isn't an option or luxury. It's a financial and moral imperative. If you're familiar with my work, you know the only financial advice I ever give is to buy and hold Bitcoin for the long term. This has never failed anyone. If you want to buy Bitcoin, I strongly recommend using Swan, a group of hardcore bitcoiners laser focused on making Bitcoin easily accessible. While most scramble to react to each new crisis, Swan Private clients are already positioned in the only monetary asset with absolute scarcity, Bitcoin. Swann Private partners with families and institutions who share a principled conviction in Bitcoin as the foundation for multi generational wealth. 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They produce the legendary OpenDime, the first Bitcoin bearer asset, as well as the reliable cold card hardware wallet. The excellent stainless steel seed plates for storing your seed phrases, and the block clock give them the best outcome and they do that by providing others with the best outcome that they can provide. So you run a business and you try to make that business as efficient as possible by reducing your cost as much as possible and increasing your revenues as much as possible. And the better of a job you do by producing the better outcome at the lowest cost. The more value you create for others, the more economic well being you contribute to others, the better off you are. Here's how we can think about markets and how markets operate for consumer goods, for instance, this is the way in which economists like to think about how we make decisions on consumer goods. People rank goods ordinally in relation to each other, so they produce a value scale. A value scale allows us to look at different things, different objects, and weigh and decide which ones we prefer. A value scale shows the valuation of different goods against monetary units. So we can do valuation scale of different goods against each other. So apples versus oranges versus bananas. But also we can do valuation on a value scale of different goods against money. And in a market economy we're doing valuation against money. Usually in some econ textbooks they go into more detail in doing the valuation of goods against each other. But here I chose to just go straight to the one with money because I think it is more conducive to delivering the understanding of how we actually make decisions in a market. So this is what we call a valuation scale in this chart here, figure 20, and it shows us how much you value of each goods how much you value a good compared to monetary units. So the Remember the important concept we discussed earlier in the book? Diminishing marginal utility with each added unit of a particular good. The marginal utility declines. So the total utility for all goods increases over time, but the marginal utility of the next good declines compared to the previous good. So you still prefer 2 pounds of beef over 1 pound of beef, but your valuation for the second pound is lower than the valuation for the first pound, because the first pound is the first one that you get, and it's going to be meeting your most pressing needs. For beef, it's the difference between hunger and survival, between starving to death and survival. So this example, I come up with an example of how much a person would value the first pound of beef. And this is something that we can deduce by simply asking somebody about their purchasing decisions. So if you go to somebody and you ask them, you are only able to purchase one pound of beef today, and you're not going to be able to find any other pound of beef. And if you don't purchase it, you will have no beef. But for this pound of beef, would you be willing to pay $5? If they say yes, then they clearly value it more than $5, $10, $20. You keep asking what price they'd pay for it, and you'll get an idea about how much they'll value it. So in this example, let's assume the person values the first pound of beef as more than $30, but less than $31. So they'd be willing to pay $31. Sorry. They'd be willing to pay $30, but they wouldn't pay $31. So on a value scale, they prefer having $31 to one pound of beef, but they prefer having a pound of beef to $30. Now, once they've had the first pound of beef, you ask them, how much would you pay for a second pound of beef, given that you already have the first one, now you're considering the second one. Clearly, the marginal utility from the second one is going to be lower than the first one. But how much lower? And so in this example, we'll see that this person would be willing to pay more than $16 for the second one, but less than $30. So the second pound of beef is valued somewhere between 16 and $30. The third pound of beef is valued more than $12. So this person would be willing to pay up to $12, but wouldn't be willing to pay more than $12 for it. So for the first pound of beef, you'd pay $30. For the second pound of beef, you'd pay up to $16. For the third pound, you'd pay up to 12. For the fourth, you'd pay up to 8. For the fifth, you'd pay up to 4. For the sixth, you'd pay up to $2, and for the seventh, you'd pay $1. And then for the eighth pound of beef, you'd pay less than a dollar for it. And it's something that you would effectively only acquire if given for you for free, to the point where, even if you were offered unlimited beef, and here assume, of course, that there's no resale value for it, you can't take it and resell it. But we're talking about for your own consumption, even if you were offered unlimited beef, you're not going to be eating more than eight pounds of beef a day. I'd be very impressed if you manage to pull that off. But generally, I think this is pretty much an upper limit on how much most adult males would eat in a day. So that even if you gave me unlimited beef, at zero dollars, I'd only be able to eat eight pounds of beef. And so for the eighth pound of beef, I wouldn't pay up to a dollar. And so this chart, this valuation scale, allows us to develop this, what we call demand schedule. In this demand schedule, we see how much at each market price is the quantity that is demanded. So at zero dollars, if the price of beef was zero dollars, if I was given unlimited beef, I'd only eat eight pounds in a day. If I had to pay a dollar, I'd eat seven. If I had to pay $2, I'd eat six. If I had to pay $4, I'd eat five. Five, eight dollars, four. Twelve dollars, three. Sixteen dollars, two. Twenty dollars, only one. Thirty dollars, only one. And at $31, zero beef. So at $31 is the price at which I stop buying any beef. So we could chart this. We could plot this in what we call a demand curve. Again, this is all derived from the valuation scale. So from this valuation scale, we can see that if the price was $0, you would demand 8. If the price was $1, then you would only demand 7 pounds of beef. You'd only be able to buy 7. That's how much you'd pay if the price was more than a dollar, and if the price was $2, you'd buy six. So from that, you're able to develop a schedule for how much you demand per unit. And from that we develop a demand curve. That's what Figure 21 is. Figure 21 shows us the quantity that you would demand at every given price of beef. And we do this from price zero. Up until price 31. And you see, this chart shows us exactly how much quantity you demand at each price. And this curve, as you'll notice, slopes downward when the. When the price is high, then the quantity is low, and vice versa. When the quantity is high, then the price is low. So this has a downward slope. And the downward slope of this graph is called the law of demand. As the price increases, the quantity demanded declines. Demand curves always slope downward, or at least are vertical, but they cannot slope upward because the quantity demanded of a good cannot increase as the price increases. So demand curves always slope downward. Now, in this case, we're looking at the demand curve for one individual. We're just looking at one guy buying beef, and this is how much beef he'd buy at any particular price. Now, on the other hand, we can also develop something called a market demand schedule, which is what would happen if we had several people getting together and deciding how much money they. How much money they want to spend on beef and how much they value it. In other words, this is the quantity demanded for one person in Figure 21. Now, imagine if we add another person and we take those two people together. Imagine if those people are two people are identical in their preferences. Then what happens here is that the demand curve doubles and it shifts to the right so that Instead of at $30, instead of having one pound of beef, we'd have two. And at $8, instead of having four pounds of beef, we'd have eight pounds of beef because we're adding two people. Now imagine if we did it for 100 people or something like that, and they have similar preferences to one another, then we'd add all of these. Instead of it at being at $0, instead of having 8 pounds for one person, if we did it for 100 people, it'd be 800 pounds for 100 people, for $1, it'd be 700 pounds. For these 100 people at $2, at 600, at $4, it's $500. At $8, 400, because we're just effectively multiplying everything by 100. But to simplify, we could, because it's not exactly, you know, we will say these. This is like an average person, but realistically, there's going to be some deviation, and so the curve is going to look a lot more straight. So figure 22. We look at the market demand curve, and we see the market demand curve looks a lot more like a straight line because there is variation between the people. That allows us to have a more smooth function rather than what we had in figure 21, which was a step function. Okay, so we're smoothing this curve because we're adding people that are not exactly identical, but we're getting this like an average. And so because it's an average, we can say that with 100 people we don't get a step function. Where we go from. Now for a quick word from our sponsors the Bitcoin Standard Podcast is brought to you by the safehouse.com, my independent publisher and bookshop selling the best bitcoin books in high quality cloth hardcovers built to last for generations. Most books these days are pretty fiat. 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And this helps us understand how much demand the market overall demands of a particular good, that this is the quantity that people will want at any particular price for the market overall. This is what do as a market demand curve. Now, what happens on consumer side of markets, sorry, on the producer side of markets is a very similar process. Producers face a similar ordinal ranking in their decision making. And so that shows us what happens with ordinal producer value scale. We see that in figure 23. And so the producer, you have to understand, he faces costs for production and he faces the market price. And because the market price is expressed in money in one good, he's able to perform economic calculation. And the way that he performs economic calculation is to compare the market price for the quantities of goods that he's able to produce at any given market price. And so naturally, the higher the price, the higher the quantity that this person is able to produce. The bigger the price that you are paid to produce things, the more you're able to produce, the more resources you're able to dedicate to the production process. So if you go to a butcher and you tell him you can sell a pound of beef for $6, then at $6 a pound, he's able to produce up to 70 pounds. 70 pounds of beef, he can produce up to $6. But if you told him he can only charge $5, well then maybe he needs to, he can no longer afford to produce 70 pounds, because 70 pounds at $5 is $350. And in order to produce 70 pounds, he needs to hire, say, five workers. And therefore he's unable to afford these five workers. And the rent and the equipment and the car castles of the cows that he buys, he can't afford them at this price. So therefore, if you're offering him only $5, he's only going to be able to make 60 pounds. And so at 60 pounds of beef, he's able to sell at $5. If you offered him $4, he'd only make 50 pounds, $3, he'd only make 30 pounds. So he's, this is his value scale. And the value scale shows us the quantities that he's able to supply at any given price. At a price of $0.00, he's obviously unable to provide anything. The quantities are supplied is 0. If you told him that you can't sell your beef, you have to give your beef away for free, what's he going to do? He's not going to turn up. He's not going to work for free even if you offered him $1. In this example, he can't afford to sell any beef for $1. It's not worth it for him to run his business and buy the beef and sell it for $1. At $2, it becomes possible for him to sell but only 10 pounds. He can only afford to run the business by himself. He rents a very tiny little place and he's only able to sell 10 pounds at $2. And then as the price goes up, he's able to produce larger quantities. So we take this producer value scale and we can convert it into a producer supply schedule where we see the quantities that this producer is able to supply at any given price level. At a price of 0, he gives 0 pounds. At a price of $1, he gives 1 0. Also 0 pounds. At a price of 2 dollars, he gives 10 pounds. $3, he gives 30 pounds. $4, he produces 50 pounds. $5, he produces 60 pounds. $6, he produces 70 pounds. And at $7, he also produces 70 pounds. So the quantity demanded in pounds of. Sorry, this should be the quantity supplied. There's a problem with Table 5. We'll be fixing it in the next printing of the book. So if you have it fixed, then you have the second printing. But in table five at the top, it says quantity demanded in pounds of beef. It should be quantity supplied in pounds of beef. And this is table 5, producer supply schedule. So then we take this table and we convert it into a curve, and we get the producer supply curve. And we see here that a price of 0, he produces 0. At a price of 1, he produces 0. Also at a price of 2, he produces £10. At a price of 3, he produces £30. At a price of 4, produces £50. And on and on until we get to the price of six. At which point he can't produce any more. There comes a point where even if you paid him more, he can't produce anymore. It's just the limits of how much this one particular business can produce. One butcher shop can't make more than 70 pounds a day in this hypothetical example. And so even if the price were to go up further and further, the quantity supplied will not go up beyond 70. And that gives us the law of supply. As price increases, owners of economic goods become more willing and able to sell larger quantities. As a consequence, supply curves slope upward only. So supply curves slope upward and demand curves slope downward. Interesting point we're going to see in a minute now, just like we did with the demand, we can also produce market supply curve. So not just supply curve for an individual produce producer, we can also produce the supply curve for all producers. And in this case we also smooth it out because we can assume that we're not dealing with identical producers. There's a little bit of difference. So the increases happen slowly and smoothly rather than in a step function as in the individual supply curve, like in Figure 24. In Figure 25, we see that the quantity increases as the price increases. And we see that there is a market supply schedule which is essentially adding up the supply of all the producers in this market. So in this example, assume we've got 10 butchers. So remember, we had 100 consumers, 100 people buy beef, and we have 10 butchers who are making the beef. And we multiply their productions. Assume they're similar. And so we get this market supply schedule which is visible in Table 6, which again says quantity demanded, but should be quantity supplied. So when we combine those two curves together, the supply and the demand curve, we can plot them both on the same chart. And that's what we do in figure 26. So as you see here, figure 26 shows us the quantity supplied for the market overall. And the quantity supplied increases. It's an upward sloping curve, whereas the quantity demanded decreases. It is a downward sloping curve. Because one curve is sloping upward while the other curve is sloping downward. It necessarily follows that those two curves can only meet at one point. They might not meet. If they don't meet, then we don't have a market. Then we, we have a good where the valuation of the consumers is too low compared to the output of the producers, compared to the cost of the producers. And so these things don't get made. So think of, for instance, the market for mud pies. There's very little demand for mud pies. Very few people will pay money for mud pies. I mean, I'm guessing some people might pay a little bit as a prank or something like that, but it's nowhere near enough to run a mud pie industry. If you wanted to produce mud pies, you need capital equipment, then you need mud, then you need things to mix the mud with, and that ends up being quite expensive. So in that case, the demand and the supply curve don't meet. And so that's why we don't have a market in mud pies. But for markets that exist, the fact that the market exists means that the demand and the supply curve must intersect at some point. And how we think of this is, I think, very useful for understanding how markets Function, at any given price, there is a specific quantity that producers are able to produce and a specific quantity that consumers are able to consume or that consumers demand. And so there's only going to be one point in which those two quantities are equal. At every other point, either there's going to be more quantity supplied than demanded or more quantity demanded than supplied. The point at which those two lines meet, which, in this example in Figure 26, you can see, it's when we have a quantity of 500 pounds of beef at a price of $4. At that point, that point is what we call equilibrium. And so at that point, think of it this way. Equilibrium is the point at which, when given that price, consumers demand a quantity that is equal to the quantity that producers would produce at that point price. And this is, there can only be one point where this happens. And if you wanted to understand how really markets function, this is a very useful mental framework because think about what happens if, instead of having one equilibrium point, instead of the price being at equilibrium, what happens if the price is raised? So what happens if in this example, for instance, where the price is $4 a pound and the quantity is 500, what happens if the government mandates that beef needs to be sold at $6 a pound only that if you sell it for $4, you go to jail. What happens in that case? Well, at $6, look at the figure 26, you see that at $6, the quantity that is demanded at the demand curve, you go from $6 to the demand curve and you go down to quantity, and you see that the quantity is around 450. People will only want to eat 450 pounds of beef if they had to pay $6, right? But on the other hand, what's the quantity supplied? As you can see, at a price of $6, producers are able to make 700 pounds of beef. So what does this do? From 400, we have people who want to buy 450 pounds of beef at $6, but we have producers who are making 700 pounds. So that means we have 250 pounds extra and we call that a surplus. And that's what happens when the price is too high. If the price is set at a level that is higher than the market equilibrium price, then we're going to get a surplus. Producers are going to have more than the consumers demand. And of course, what's the way around that? The way around that is for the producers to lower their prices. Now, of course, you can have shortages and surpluses that emerge in the market naturally. If consumers or if producers miscalculate and place a high price. So you could be a butcher and you say, I'm going to be selling my beef at $6. And then you realize you can't sell all of your beef at $6. But if you bring the price down, then, yeah, you can sell more. So people will bring the price down in this case, and that's going to cause the price to head down to equilibrium. So a similar thing is going to happen if the price is lower. Imagine if the butcher goes to the market and says, I'm going to sell my beef for $2 only. Well, at $2, producers are only able to make 100 pounds of beef. As you can see from this point on the supply curve, at a price of $2, the supply curve is pointing to a quantity produced of $100. Whereas at a price of $2, consumers are going to demand 600. Consumers want 600 pounds of beef because it's cheap now it's only $2. So they're going to want to buy a lot of beef. So now what do you have? You have a shortage. You have a shortage of 500 pounds of beef. The price is so low, consumers are asking for a lot, and producers are only able to offer them a small quantity. So what would you do as a producer in this case? You would raise your price, and raising your price would allow you to produce more beef and will reduce the demand. And so you go and you next day and you say, all right, I'm only selling for $3 today. So what happens at $3, you're able to provide, or all producers are able to provide 300, and consumers are going to demand something like 550. So there's a smaller shortage today, but there's still a shortage. So what do you do? You raise the price even further. You raise the price to $4, and now you are producing 500, and consumers are demanding 500. So we're at equilibrium. So it's important here to understand that equilibrium isn't some stable state where we are going to be stuck forever. It's better to understand equilibrium as not an endpoint, but as a process. We don't really have an equilibrium because prices of things are always shifting around almost every day. What we have is an equilibrating process which is constantly taking place in the mind of producers every single day. So as a producer, you are constantly oscillating in your price around the supply and the demand curve and around the equilibrium point. Point. And when you set your price too high, you realize that you're not selling enough and you're producing too much and you're not selling enough and the demand has gone down. So what do you do? You bring the price down until you're able to sell all of your inventory. And if you overshoot in the other direction, bringing the price down too much, then you're gonna run out of your inventory and you're not going to be able to meet all of the demand. So you're going to have to correct by going, raising the price back up. But of course, the demand of the supply curve aren't set in stone. So they're constantly shifting, they're constantly moving around. New factors are affecting people's demand and affecting your supply decisions. And so therefore, we're constantly oscillating around an equilibrating process rather than an equilibrium end point. And that's how markets function. And so, yes, there are differences in prices and people make different pricing decisions, and that's them being part of this equilibrating process. This is what is happening. So that's why I say it's better to think of equilibrating process rather than an endpoint equilibrium. Equilibrium is not a final state. It's a process of constant discovery in reaction to changing conditions. What are these changing conditions? These curves, the supply and the demand curve, are very useful tools for helping us understand how markets react. And now, I mean, it's important to understand that we don't ever really have these demand curves in for any particular good, because we're never really able to observe in reality how people would react to all those prices. So we don't really have a way of determining exactly how much beef is going to be demanded at a price of $10 or $5 or $6 or $8, because every single day we only have one price on the market or a few prices. And we don't know what the world would look like if the price were to double or triple or if it were to go down 80%. So even though this isn't an accurate, this isn't an accurate illustration of reality, as are very powerful tools to keep in mind. Because once we start understanding how they react dynamically to changes in the economy, we are able to understand how markets function in a very powerful way. And so an important thing to understand when we're looking at these curves is there are two kinds of changes that can change this dynamic. There's a change in the price, which results in the change in the quantity demanded. Movement along the curve. In other Words, but the curve itself stays static. So if we're looking at Figure 26, you see, if the price changes, the curves are the same. Nothing changes about the curve because the curve is a function of the price. And so being a function of the price means that when you change the price, you're still moving along the curve because the curve is just a function of every single price point. On the other hand, changes anything else that affects the market other than the price will cause a movement in the curve itself, not a movement along the curve, but it will shift the curve either to the left or to the right, meaning that any, at any particular price, we're going to have a higher quantity demanded or a lower quantity demanded at a given price. So those are the two kinds of changes that can happen in this. In this mental framework of supply and demand curves. So what are these other factors that can affect the shape of the curve or that can move around, move the curve around? Well, we can think in the case of demand things, things that can change the demand curve are changing preferences. So, so if people decide that they like apples more, that's going to cause apples to be demanded at higher quantities at any particular price point. So let's say somebody puts out a popular cookbook which is all about apple recipes, new apple pie recipe, new apple, new all kinds of foods that you can make with apples, and that book becomes really popular. Well, now everybody wants to buy more apples than they usually do. And so even if the price of apple remains the same, people are buying a larger quantity of apples. And if the price of apples goes up, people are buying a larger quantity of apples than they would have before this new book came out. So this change in preferences changes the quantity demanded at every given price level. In other words, it shifts the demand curve. So if you look at this plot here, figure 28, it would be expressed with a movement from D1 to D2. So we are. Imagine this is the market for apples, and this is the equilibrium point. It's the intersection of D1 and S1. And then new Apple Cookbook comes out, and everybody wants to buy more apples. So now at this particular price point, the quantity demanded is going to shift, and it's going. And so the demand curve will shift to the right, and the demand curve will shift to the right because the quantity demanded will increase at any given price level. So pick any price point on the x axis, sorry, on the y axis, on the price axis, and the quantity demanded is going to go up. In other words, the price, the. The quantity demanded at each particular price point is going to go up. So D2 is going to shift to the right from the one. In other words, we're going to get a higher quantity demanded any particular price. And this is one way in which this happens. Another one is income. If income on wealth rises, then what happens? If people have more money, what are they going to do? They're likely going to buy more of this good. So people are richer now, so they can afford to buy more apples, make more apple juice, more apple pies, apple strudels, whatever. So now they can afford more apples. So the quantity demanded of apples increases at every given price point. So D2 is a shift to the right from D1. And so this is the case for most goods, which are what we call normal goods, goods that people buy more of when they have more income. There are other kinds of goods which we call inferior goods. And these are the goods that you buy less of as your income rises. So for an inferior good, you would get the curve actually shift to the left if you had an inferior good and people become wealthier or their income rises, or they become wealthier. Well, now because they're wealthier, you don't need to buy as much of that poor people good. You can buy the good stuff. So a good example here is beans. As people become richer, they consume fewer beans and they consume more beef. You can think of, say, demand for bus rides. As people get richer, fewer people need to take the bus. More people buy their own cars. And so you can think of these inferior goods as being the goods for whom the demand curve shifts to the left. We move from D2 to D1, a lower quantity demanded at every given price point. Another thing that can affect the shape of your demand curve is, is the price of other goods. So this figure 28 is the price of good A. If we're looking at good A, well, there are other goods that might affect it. And so imagine if the price of another good goes up and this causes the demand curve for curve A to shift to the left. What does that tell us? It tells us that A and B are complementary goods. And so we defined complementary goods as being goods for whom the demand curve would shift to the left if the price of one of those goods goes up. So a good example here is, for instance, milk and cornflakes. A lot of people, unfortunately still eat this horrific, horrific, very harmful thing for breakfast where they mix their milk with a bunch of corn flakes, which was invented by Harvey Kellogg in order to destroy people's sexual drive because he was an insane person, and yet he managed to convince a lot of people to eat this. But in any case, those two things generally are sold together. People who buy them buy them together. So what happens to demand for milk? If the price of cornflakes doubles, something happens to the corn crops, and it makes the price of corn go up double. Well, at that point, your plate of corn flakes has become a lot more expensive, because even if the price of milk stayed the same, the price of corn flakes itself has gone up. So now, if you want to buy more cornflakes, that requires if you want to buy the same quantity of cornflakes, it requires a higher amount of money. And so therefore, what's going to happen to the quantity demanded of cornflakes? It's going to go down, but the quantity of demanded of cornflakes has gone down because the price of cornflakes has gone up. So in the example of cornflakes, we're still on the same demand curve. So this would still be D1, but we're moving from a point low on D1 to a higher point on D1 with a lower quantity and a higher price. But for milk, on the other hand, something different is happening. The quantity demanded of milk is declining at every single price level. Even if the if the price of milk stays constant, the quantity demanded declines. And whatever the price of milk, we're going to have a lower quantity demanded of milk at every given price level than we would have had had the price of cornflakes not gone up. And so, in this situation, the demand curve for milk would shift from D2 to D1 in Figure 28. In other words, we shift the demand curve to the left. In other words, the quantity demanded declines at every given price level. On the other hand, if the price of good B rises but the demand curve for good A shifts to the right, then A and B are competitor goods, and competitor goods are things that people substitute for one another or competitor. Another term for it is substitute goods. So this would probably be an example for apples and oranges. People can buy apples or they can buy oranges. They can also buy both, but most people likely buy a combination of the two. If the price of apples goes up significantly, a lot of people are just going to reduce their consumption of apples at whatever price for oranges, and therefore increase their consumption of oranges at every single price price point. In other words, the demand curve for oranges will shift to the right from D1 to D2 in Figure 28. At every given price level of oranges now we're going to be demanding a higher level of oranges than we would have otherwise had the price of apples not gone up, because A and B are competitor or substitute goods. So this helps us understand market dynamics, how things move around and what happens as prices change for particular goods. And the other and similar process happens with supply curves. Figure 27. We see the relationship happening with the supply curve S1 and S2. They can switch from S1 to S2 shifts to the right. And what are the things that can cause the supply curve to shift? Well, it matters, for what matters to this are the things that affect the consumer, the producer's decision. So mainly the producer's costs of production of the good and the price of other goods that the producer can produce. So if you're an apple farmer, your decision to produce apples obviously is determined to a large extent by the price of apples. But that's what the supply curve shows us. So the supply curve shows how much apples use will sell at any particular price. But then if you discover a new technological innovation that allows you to make apples at a cheaper cost, let's say you move away from tilling the ground with a donkey and you get a modern tractor, well, that makes your productivity a lot higher, and so that lowers your cost. And so you're able to supply a larger quantity of apples at every given price level. And so therefore this would shift your supply curve from S1 to S2 at any particular price for apples. You're able to make more apples now because you have a higher productivity, because you've got a modern tractor rather than an expensive and slow and inefficient and moody donkey. So if your producer costs fall, you can supply a higher quantity at every price level. So that cur causes the supply curve to shift to the right and S1 to S2. On the other hand, if your producer costs rise, if you're a producer and your costs rise, something happens and the cost of the fertilizer that you use goes up. Let's say, well, now you can supply a lower quantity at every given price level. You're only able to produce a smaller quantity at every given price level. So that causes the supply curve to shift to the left. In figure 27, this would be the move from S2 to S1 1. And so one way to understand this, to think about why producers behave this way, is imagine if you are an apple farmer. I think this is a good example to think about. If you're an apple farmer and you have a large plot of land that you can use for apples. The more that the price of apples goes up, the more resources you can invest in the production of apples, and the more of the marginal and least productive land you can get use. So if the price of apples is very low, you're only going to be able to economically harvest apples from one small part of the farm, the part that's closest to the road, the part that's easiest for you to do, the part where you can do it with a little bit of effort without having to hire a lot of people. But if the price keeps going up, you're able to invest more workers, more equipment, and you can go into the less productive parts of the farm and so that you're able to produce more and more at every given price level. But then the same dynamic with other goods happens for the producer. If you're an apple farmer, there's a set quantity of apples that you can produce at every given price. But then let's say the price of oranges rises drastically. Well, what does that do to you? While the price of orange is rising drastically now changes your calculations. Instead of dedicating this farm or this part of your farm to producing apples, maybe now some of it makes sense to produce more oranges. And so you shift a part of the farm, you uproot some apple trees, and you plant orange trees instead, because you expect that you're going to be able to make more money from oranges. So if the price of good B rises, in this case oranges, producers can shift from from producing A to B. So producers can shift from apples to oranges. And so what does that do to the supply curve of apples? The supply curves of the supply curve of apples shifts to the left from S2 to S1. But if the price of good beef falls, if oranges become cheaper, well, then the opposite is going to happen. Producers are going to shift some part of their farm from producing oranges to produce producing apples. And that's going to make the farm more productive because it is more productive of apples at every given price level of apples. So that shifts the supply curve to the right. In this figure, it would be moving from S1 to S2. So this discussion has focused so far on consumer goods. This is how consumers and producers take decisions in consumer goods. Similar analysis happens on the side of producer goods, in other words, capital goods, goods that are used for production, with one important distinction, which is that consumers weigh the value of consumer goods against their own preferences and against their own monetary resources. Whereas in the case of producer goods, capital Goods, your own preferences as a consumer do not matter. You do not buy capital goods in order to consume them in order to enjoy them. You buy them in order to turn them into final goods. And so what matters for producer goods is their ability to produce final goods. That's what concerns you as a producer. So producer goods, things like capital, land, and labor in their markets. Producers do not assign ordinal scales for goods based on the utility they derive from the producer producer goods, but on the products that they deliver. Each production good is employed to the extent that it contributes more revenue than it costs. This is the key thing to understand. You will hire a worker, or you will buy a machine, or you will borrow money, or you will buy a plot of land to the extent that adding that factor of production to your production process will contribute output that is monetarily worth more than the price that you pay for that producer good. This is the most important thing to understand about production process. Producers make this production process a decision. At the margin, the marginal revenue from each deployed unit has to exceed its marginal cost. Every extra worker that you add to your business has to provide more revenue than you pay in wages. And so consumer valuation of final goods is what gives value to producer goods, because ultimately, it's about how much those producer goods can produce of the final good and how much the consumers value the final good. So worker wages or capital returns are merely a reflection of consumer valuation of the product of these resources. The reason that a particular worker earns a certain amount of money is that this is what their productivity dictates in terms of the output that he is able to produce. And that is what the market values or what consumers value his output for. And so businesses that pay rates different from what consumer valuation dictates will simply not survive next to those that are responsive to consumer valuations. In other words, if you have a business that and you decide that you're going to pay people according to how much you think they should be making, you're not going to cut it, you're not going to make it, you're not going to succeed next to a businessman who is paying people what they are able to produce. And it goes both ways. If you decide to pay people less than the value of their production, then you're not going to make it because those people are going to leave your job and go work for somebody who pay them the full value of product production. Similarly, if you decide to pay people a lot more than what their production is valued at and a lot more than what their consumers value their production, then you're also not going to make it because you are going to be paying them a price that is higher than the value that they contribute to your business. And therefore they are costing your business money. So the more you have those people in your business, the more you are able to, the more you are going to lose money. And eventually that's going to be unsustainable, and your business is not going to survive in that situation. So this is what drives economizing in the producer market and in general, economizing in the market order become more and more productive as we economize in this market order, because we are able to trade with a larger number of people, we're able to cooperate with a larger number of people, and we're able to sell our goods to a larger number of people, and we're able to purchase the goods that we want from a larger number of people, which gives us an improved choice that allows us to find things that we want at the most suitable cost for us. In other words, this is what makes us different from animals, because animals are constantly in conflict with one another, but human beings can cooperate with one another. We are able to benefit one another by cooperating with one another. And that's why we build civilizations in a way that other animals don't and can't build. The ultimate driver, ultimately of all of this is consumer sovereignty. Consumer sovereignty. As we were seeing just now, you as a producer, you are driven by what your consumers value, and so you are always looking to serve them. Their valuation of the final goods is what dictates the market rate of return on your factors of production, on your capital, on your labor, and on your effort as an entrepreneur. And this is an important point because most people tend to think of capital as being a way for people to exploit society. You're rich, you're a capitalist, you have a machine, you have factories, you have large businesses. Therefore, you're able to exploit society. And this is completely mistaken. In fact, it's the other way around. It's society that controls you when you're a capitalist, because you are only a capitalist to the extent that you are able to utilize your resources in the service of others. If you are not serving others with those resources, you will lose your business. And somebody else is going to make a better living out of combining those resources in a way that is more effective at serving others. You have to use your capital to serve others, as we discussed in the chapter on capital. And you serve others by constantly performing economic calculation you're constantly looking at the resources. You're your machines, your land, your workers, all of the resources that you're putting into production. You're trying to produce the best output possible at the lowest price possible in order to serve others. Because if you don't, you lose that capital. You are not going to be able to keep it up operating as capital. Capital only exists to the extent that it is serving customers. If it's not producing things that customers value at a price that is higher than the cost that goes into producing those things, then that's not capital, that's destruction. You are just wasting your wealth away. And no matter how rich you are, eventually you will run out of wealth. If you engage your wealth in a process of destruction, eventually this destruction will destroy the capital that you have. So the only way to keep capital is to continue to serve others. That's why consumers really are kings in the market economy. And finally, the last section of the book discusses why prices are the way that they are. I think this chapter, the main lesson to take from this chapter is that prices aren't just arbitrary numbers that producers put on their goods in order to mess with consumers, in order to control consumers. Whether it's the wages of their workers or if it's the price of their output goods. At every single point in time, everything is being determined by the consumer. The consumer is what determines how much they value those things. And the producers have to try and produce as much as they can at the valuation that the consumers want. The consumers decide how much they value the output of the worker, and therefore it is the wage that is given to the worker. That wage is determined by the consumer as well. The only job for the producer is to try and figure out how to satisfy the consumer. The producer cannot impose his preferences on the consumer because he has no way of forcing him of buying his product. And keeping this in mind helps you understand everything in a market economy in a much more productive and useful way than the usual than the usual way in which these issues are discussed. Because just ask yourself what happens if a party to a production process of a producer or a capitalist decides to make prices different from what the consumers are dictating. So consumers are. You're currently. Go back to our previous example, you're currently producing 400 pounds of beef and you're selling them at or 500 pounds of beef at $4. What if a producer decides that they want to raise the price to $6? Well, that producer is just going to be ending up with a lot of surplus beef. That he can't get rid of. And the only way that he can get rid of it is to bring the price down further. Similarly, what happens if he decides to lower the price a lot more? Well, he's just going to run out of beef very quickly, and he's not going to be able to hire as many people as he can. He's going to be giving up profits. He's going to be giving up on hiring people because he chose a very low price. And either decision is going to ruin the business. So you have to work as a producer. You have to walk a tightrope. If you lean too much to the side of lowering the prices, you don't generate enough revenue to continue to operate, and you go out of business. If you lean toward the side of higher prices than what the market is dictating, than what consumers are dictating to you, then you lean toward the side of also going out of business, because you're going to end up with surplus production that you can't get rid of. You are not the master of the consumer. As a producer, you are following their wishes and their commands. And that's what makes the capitalist system so powerful. Because we live in a world in which we're all cooperating with one another in order to better serve one another, in order to better provide for one another. Thank you very much for joining.