Using Market Forces to Manipulate Supply and Demand

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  • 0:04 Market Forces at Equilibrium
  • 0:45 Producers -- Supply &…
  • 3:05 Consumers -- Supply &…
  • 3:55 Illegal Movements
  • 5:32 Lesson Summary
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Lesson Transcript
Instructor: Kevin Newton

Kevin has edited encyclopedias, taught middle and high school history, and has a master's degree in Islamic law.

While the forces of supply and demand are powerful, they are not immobile. This lesson explains how various market forces can cause the supply and demand curves to shift.

Market Forces at Equilibrium

You may remember from earlier lessons that supply and demand curves meet at a point called equilibrium, which the market effectively decides is the best point for all involved. However, equilibrium is never maintained for long in the vast majority of markets. After all, consumers are always after a better deal, and producers are always after a bigger profit. Luckily for both, methods exist for manipulating both the supply and demand curve. Many of these are perfectly legal; however, the illegal ones offer a perspective on just how extreme these movements can go.

Producers - Supply & Demand Shifts

Imagine that you own a firm that produces MP3 players, and actually has a substantial share of the market in producing them. However, you can do a great deal to influence the price of those gadgets. How would you increase your profits? Let's say that you and your competitors can all produce an MP3 player for 100 bucks, and then sell it for 200 dollars. But, what if suddenly you found a manufacturer in a developing country that could do it for 50 dollars per MP3 player. Your firm has just innovated, or found a new way of doing something that lowers the price per unit produced. Now you could do one of two things. You could lower the prices on your MP3 players, forcing your competition to take lower profits. This would shift the supply curve to the right, lowering prices but raising quantities sold. Alternatively, you could keep your prices at the same level, making more profits in the process.

Of course, that's a supply-side solution, but producers have another option available to them. Think about what happens whenever a company releases a new product - they advertise it. They try to make it cool. What if suddenly every celebrity is seen with your MP3 player and it is soon assumed that to be cool, you have to have one of your company's MP3 players? Sounds familiar, doesn't it. Suddenly, the demand for your MP3 player, and your MP3 player alone, has shot through the roof. This means that people are willing to pay a premium for the 'coolness' factor of your gadget. Your competitors are caught between trying to catch up or trying to lower their prices to gain a new group of customers who otherwise wouldn't have bought an MP3 player, but you are sitting pretty with your famous celebrities and a chunk of cash. Advertising has caused an increase in demand and has resulted in a shift of the demand curve to the right. That means that people are willing to pay a higher price as well as buy more goods.

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