 Hi everyone. Robert P. Murphy here. I'm an economist giving a lecture for the Online Mises Academy. Today we're going to be talking about supply and demand. And we're going to be focusing on the chapter for my textbook, Lessons for the Young Economist. Now if you want to get this book, there's a free PDF version. You just Google Robert Murphy, Lessons for the Young Economist PDF. You'll be able to find it. Or of course if you go to the Mises Institute bookstore you can get the hard copy. Now I should stress at the beginning that even though the Mises Institute is the leading bastion of Austrian economics, the material in today's lecture is actually going to be fairly mainstream. And I think that it's important to stress supply and demand and how to draw typical supply and demand curves that just about any professional economist would endorse because it helps organize our thinking. So in many other areas Austrian economists including me are very skeptical of the curves that one would draw like marginal cost curves and so forth when you're doing the theory of the firm because it gives a misleading account of what happens in the real world. But actually when it comes to just standard supply and demand graphs I think that they're actually very useful to help organize your thinking. So the first thing I want to stress is that we don't have as economists a theory of supply and demand. It's not really a theory. That's not the right way to think about it. There is nothing that could ever come up that would make economists say oh my gosh we we've been using supply and demand all these years but actually it turns out that's wrong. That these things are an invalid way of looking at the world. That's not really what would happen and if you think that could happen you're misunderstanding what supply and demand curves do. So what they are and we're going to go through in the course of this lecture exactly how they work but from a 30,000 foot view what they are is just a way of organizing our thoughts coherently so we can put the various factors that might move prices and quantities around into different categories and that just helps us to make sure we're thinking through things properly and really what it does more than anything else is helps us to avoid arguing in a circle and so you just believe it or not just within the last two weeks I think I've used supply and demand three separate times that I can remember off the top of my head that either giving up one time I was actually giving a lecture and somebody in the crowd asked me something and it had to do with interest rates and he was worried about well wait a minute you said that if people save more interest rates tend to go down but then wouldn't that make people want to borrow more so would that push the interest rate back up and I had to just you know I was trying to argue with him in words and get him to see why that doesn't work and then I finally had to go to the board and draw supply and demand curves to show him what I was trying to say and why his particular worry was unfounded you might also see that same kind of confusion or circular argument a lot of people are talking about oil prices for some reason I've seen it a lot in that context where someone will say something like oh OPEC cut its production quota this quarter they just made the announcement they're going to be reducing output by such and such barrels per day so that means the supply is going to go down so that means the price of oil will go up but with the higher price of oil that means people will demand less of it and so that'll push the price back down and so you're left wondering well wait a minute does when all is said and done is the price higher or lower than when you start it you see the problem there so it looks like you never know where you end up and it looks like a price hike turns into a price fall and vice versa so that's the kind of thing at this introductory level that I want to make sure that the student learns how to avoid that I want the student to be able to think through and understand the impact of some external change on prices and quantities and for that type of exercise like to be able to say suppose OPEC all of a sudden surprises everyone by announcing it's going to produce less oil per day what's going to happen just to be able to think logically through the sequence of events and end up with a coherent answer that's the kind of thing that introductory supplying demand curves are great for or for the first issue I brought up where the gentleman was concerned that well wait a minute if people end up saving more the yet it might initially push down interest rates but then won't people borrow more because it's cheaper to borrow and won't that push up interest rates and it seems like we can never get interest rates to move on where the other that there would be this automatic reverse process that would kick in it's that kind of thing that I want to equip you to be able to think through so it's not that you're going to end up with quantitative predictions about what's going to happen but just that you can organize different forces in your mind and that you understand whether the outcome is going to be to in one direction or another that's the modest goal that we have but it's a very important one and that's fundamentally what thinking through supply and demand will help you do for an analogy it's perhaps like a household making up a monthly budget right just just saying okay they sit down and said let's say it's a couple they sit down they look at their bills they look at their pay stubs and other sources of income and they just put it into a standard budget and it's not that they have a theory of finances when they do that and it's not that putting the numbers into a budget somehow changes their financial picture and especially if they just start using Excel to generate pie charts or graphs over time to show you know hey what's our credit card debt been over the last 12 months and so forth I mean that's just different ways of organizing the information for the couple so that they can really get a sense of the big picture and understand their situation and certainly influences the decisions they'll make but it's not that the that the construction of a budget commits them to one view or another it's not that the budget per se makes them want to cut spending or makes them have to go get a second job or says oh we can afford that trip I mean it's the budget constructing the budget helps you understand the reality and so by the same token using supply and demand curves in and of itself does not commit you to becoming a free market economist you could be a Marxist in you supply and demand curves or you could be a Keynesian you supply and demand curves it's what you do with them that ultimately determines what your policy prescriptions would be or how you interpret them so the last point on that is sometimes it's true you will hear people say something like let's say there's a snowstorm and then the price of canned goods and tuna fish and things like that goes up at the store and batteries and flashlights and bottled water everything it's really expensive and some people are outraged and other people you can imagine who have taken introductory course in economics might scoff at these ignorant rubes and say oh come on that's just supply and demand and that that is true in the sense that using supply and demand it's obvious to us why you would expect prices to rise in a free market when there's a snowstorm and then people are concerned about the availability of getting their hands on those goods if the roads are closed and they're snowed in but strictly speaking just supply and demand curves per se doesn't mean that this is a good outcome or that we shouldn't worry or that the government has no role in doing something about this outcome so as we go through this course and go through my book lessons for the economist we are going to come up with some conclusions and we're going to walk through some things to understand what would be the likely consequences if the government were to pass a law saying it's illegal for merchants to raise prices on batteries and bottled water and so on and we're going to use supply and demand curves in those explanations for me to try to illustrate to you what the consequences would be but my point is the curves themselves are just the concepts of supply and demand is just a neutral framework that helps us organize our thoughts