Supply and demand

About this course

In 1776 Adam Smith opened The Wealth of Nations with a pin factory. He counted 18 separate tasks in making a pin, such as drawing the wire, cutting it, straightening it, and putting a head on one end and a point on the other. One worker doing every step alone might make 20 pins a day, while a small shop of 10 workers, each specialising in a few of the tasks, could make 48,000. Specialisation is one of the oldest answers to scarcity, and it is where the course starts before it moves to prices.

The seven units begin with scarcity and opportunity cost, using Alphonso's $10 a week: burgers cost $2 and bus tickets 50 cents, so one more burger costs four tickets. Demand and supply then use the OpenStax gasoline tables, where raising the price from $1.00 to $2.20 cuts the quantity demanded from 800 to 420 million gallons and sellers offer 500 million at $1.00 and 720 million at $2.20. Market equilibrium shows that at $1.80 sellers offer 680 million gallons but buyers want only 500 million, so 180 million pile up, and $1.40 and 600 million is where the market settles. Shifts in demand and supply, price ceilings and floors, and elasticity close the course. In the rent-control example a $500 cap leaves 19,000 households looking for 15,000 flats, and a 10% price rise cuts restaurant meals by 22.7% and housing by 1.2%.

The Bank of Korea's children's series explains prices with trips to the market. Pears that cost 2,000 won now cost 3,000 before Chuseok because more buyers push the price up. Nobody in an office sets these prices; they come from a tug of war between buyers and sellers.