试听180秒005：Shifts in Supply and Demand: A Story about the Rising Price of Shrimp

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Hello, Himalaya subscribers. My name is Timothy Taylor.

Today we're going to discuss what makes prices of shrimp shift at the grocery store. Let's start with a question. When you're using a scissors to cut a piece of paper, is the paper being cut by the upper blade of the scissors or the lower blade of the scissors? The question might seem a little silly. The answer is obvious.

When you cut a piece of paper, both blades of the scissors are involved. Well, about a hundred and fifty years ago,economists had a similar argument. When you were discussing how supply and demand determine prices, is the equilibrium price and quantity determined by the forces of supply or the forces of demand? Back in eighteen ninety, a famous British economist named Alfred Marshall said this dispute was a little bit silly. Marshall said the supply and demand question was like the question about scissors. It's always both supply and demand that affect the price, even when only supply or only demand is moving.

Now, in this lecture, let's try and talk about how a shift in supply or a shift in demand will cause prices and quantities shift. We'll do this in three steps. First, we'll talk about what's needed to make you into a supply and demand detective. Then we'll do a couple of examples, shrimp and sand. And third, we'll talk about the idea of elasticity, which determines when prices or quantities will shift more. Let's start off with the idea of being a supply and demand detective. And of course,I'm not talking about the kind of detective who solves crimes here, but I'm talking about being an economic detective who looks at the clues and figures out the reasons for changes in prices and quantities.

Imagine you hear about some economic event that occurs. It seems like that event might cause a shift in prices or quantities in the market. How can you use a supply and demand framework to understand what happened? Well, here's some steps you would go through. First starting point is before this change happened, demand and supply in a certain market were leading to a some kind of an equilibrium price and quantity. Now something happens. And the first question you have to ask is what happens affecting demand or affecting supply? Remember, shifts in demand happen because of shifts in income, population, tastes, and the prices of other substitute goods.

And shifts in supply can happen because of changes in technology, or for some products, weather or the price of inputs. Once you've decided whether it's supply and demand, then your next question is, what's the direction of this change? Does it cause an increase or decrease in demand? Or if it's supply, does it cause an increase or decrease in supply? Then you think to yourself, how is this shift in demand or supply going to affect price? Will it push it up or down? And then the last step is to look at the other blade of the supply and demand scissors.

If demand is raising or lowering the price, you have to think about how will this affect the quantity supplied? If supply is raising or lowering the equilibrium price, how will that affect the quantity demanded? And if you go through these steps, then congratulations! You have just described the economics of how a shift in demand or supply affects equilibrium price and quantity. Now, I know that description went by fast, and it all probably sounds a little bit theoretical. So let's work through some specific examples. And in particular, let's do two examples with a bit of detail, one about shrimp and one about sand. Shrimp are sometimes caught from the ocean by fishermen using nets, but often they are produced in what are called shrimp farms. It's not a farm on land of course, like a farm for rice or wheat or corn. Instead it's a farm in the water. Sometimes it's building a barrier around water that's near a coastline. Sometimes it’s using a pond that's surrounded by land.  But just like farms on land can sometimes be hit with crop diseases, which could greatly reduce the harvest for that year.

Shrimp farms can also be hit by diseases that reduce the output of shrimp. Now, there are lots of complicated scientific names for these shrimp diseases, but they're sometimes all group together and just called early mortality syndrome. There was a big outbreak of early mortality syndrome for shrimp farms in many countries of Southeast Asia, including China. Back in two thousand and thirteen, the price of shrimp for the world on the world market went up by about fifty percent in two thousand and thirteen,including probably your grocery store. Now, can you, as an economic detective,understand what happened using a supply and demand approach?

Sure, you can. Let's go through the steps we’ve talked about before. Before the early mortality syndrome hit the shrimp market in two thousand and thirteen, there was some certain equilibrium price and equilibrium quantity out there in the market determined by supply and demand. So you say to yourself, did the outbreak of disease affect supply or demand for shrimp? If it affected supply, did it make the supply go up or down?Well, it made the supply go down. In other words, making the supply go down means that at every possible price for shrimp, a lower quantity was going to be supplied than before.

Now that drop in supply means a higher price for shrimp. And so you have to think to yourself, okay, the price goes up. What happens on the demand side of the market? Well, on the demand side, that higher price is going to cause at least some people and restaurants to use less shrimp and to substitute away toward other foods. So the overall result is that outbreak of early mortality syndrome of shrimp lead to a higher equilibrium price and a lower equilibrium quantity.

Let's try another story. This is a story about markets for sand. Sand is actually an important ingredient for many different uses. Concrete is one of the biggest uses, but sand is also used for what goes under road embankment and for making things like asphalt or glass. In fact, very fine sand has been used a lot in recent years for extracting oil and natural gas from underground formations in what's called hydraulic fracturing, or in English, sometimes it's called franking. The combination of urban development all over the world, including China and many other uses, like looking for oil and natural gas means demand for sand has been rising everywhere.

Now, there's not really a world wide market for sand, because it's obviously very heavy to ship. But prices of sand in national markets have been rising all over the world, including in China. As US example, the price of sand tripled from two thousand and three to two thousand and twelve. Now, can you, as an economic detective, understand what happened using a supply and demand approach? Sure, you can. Now, before this large expansion of sand, there was a certain equilibrium price and equilibrium quantity determined by what supply and demand used to be.

Was this increased used of sand for concrete and for oil and gas drilling a shift in demand or supply? The answer is demand. Did it make demand rise or fall? It may demand rise. So in other words,at every possible price for sand, a greater quantity was going to be demanded than before. Did this make the price rise or fall? Well, the increase in demand meant a higher price, and then that higher price would bring an expansion in the quantity supplied. There would be an expansion of existing firms and entry of new firms provide more sand.

The new equilibrium thus means a higher equilibrium price and a higher equilibrium quantity. And I hope these examples are giving you an idea about how shifts in demand and shifts in supply work. Any economy is full of these changes happening all the time. And the introductory economics class is full of these kinds of examples too. But let's move to our third point, elasticity. When a shift in demand or supply happens,would have a bigger effect on price or on quantity. Now, once we go into this idea of elasticity, that's a specific term for economists. Elasticity refers to how much the quantity demanded, or the quantity supplied will change when the price changes.

For example, if the quantity supplied or demanded changes a lot with the price, it's called elastic demand or elastic supply. If the quantity supplied or quantity demanded doesn't change very much with the price, that's called inelastic demand or inelastic supply. So let's try and understand this by using a few examples. Let's first tell the example of the dead artist. Imagine a certain artist dies, and with all the publicity about their death, their art becomes much more popular for a time. Now, as an economic detective, you notice this is a rise in demand. It will lead to a higher price.

But how much will this shift in price affect the quantities supplied? Well, the answer is it won't affect this quantity supplied at all, because this artist is dead, so no more supply of their work is going to happen. This is an example where supply is very inelastic.It does not react at all to the price. So when demand shifts and drives up the price, but quantity supplied doesn't move very much, the effect of the demand shift will be, in this case, entirely in the form of a higher price, not a higher quantity.

Let's try the second example. What about income rises and their effect in the short run? In the long run, China's economy is expanding, incomes are rising overall. Would you expect this to drive up prices in China's economy or quantities? And do you think prices or quantities will be affected more? Well, a rise in income is a shift in demand. So you would think that would tend to push up both prices to some extent. But how much will quantity supplied respond to these higher prices? In the short run, it's often pretty hard for quantity supplied to respond quickly, because decisions have already been made about how much to produce and factories have already been built. Crops have already been planted. In the short run, supply can be pretty inelastic.

And so you might expect higher incomes will cause prices to spike up for a time, kind of like in the case of the dead artist. But over a longer period of time, most goods have pretty elastic supply. That is, if there's time for producers to adjust by building new factories, putting new crops in the field, all those kinds of things; they can expand production really quite a lot. And so if in the long run, supply is elastic, then the rise in demand from rising incomes will tend to, in the long run, result more in rising quantities, and not so much in rising prices.

Here's one last review question for you on this one. I'm not going to give you the answers right away. You need to think about it a little yourself. Say a new technology is created which makes it possible to produce certain useful medicines at a much lower price. And lots of companies can use this technology. Does the new technology affect demand or supply? Whichever one it is, does the new technology lead to a rise or a fall? How does this rise or fall in demand or supply, whatever you answer, effect price?

How do you think it will shift the equilibrium quantity in this market? If you assume that demand for medicine is inelastic, would you expect the shift to affect price more or quantity more? I can almost hear you thinking about these questions. And it seems to me you are thinking like an economic detective. And okay, here's an answer for you.Technology that reduces the cost of production should be a supply shift in producing medicine. It increases supply. And that rise in supply should tend to push down the price of medicine.

With a lower price, you would expect the quantity demanded of medicine to rise. But if the demand for the medicine is inelastic, quantity demanded will not rise very much as a result of the lower prices. So given this example, most of the effect of the new technology will be a lower price for those who buy the medicine and a relatively small rise in equilibrium quantity. I hope that's similar to what you were thinking. Now, of course, the real world is complicated. There are lots of examples of supply and demand changing at the same time. In the next lecture, we'll take a look at the overall power of the forces behind supply and demand and how these forces function, even when many people don't even notice they are there.

I'm Timothy Taylor, thank you for listening to Himalaya.