 At this point, we're ready to start dealing with hypothetical thought experiments to see how they would affect the equilibrium quantity offered and the equilibrium price, or the market clearing quantity and price. Now, at this level, let me just remind you, all we're worried about is the direction. We're not going to make specific quantitative forecasts because that would defeat the purpose of what we're doing here. That would give us a false sense of knowledge or accuracy. We don't actually know all the things making up the real-world supply and demand curves, and there are things that are changing besides just the particular thing that we're talking about, and so we have no reason to expect that our forecast would be vindicated. Rather what we're trying to do is just think through logically the forces emanating from one particular change that we want to imagine. This discussion will probably make more sense once we start dealing with a particular example. For the first example, and I'm just walking through the textbook here, we're going to say, suppose OPEC makes an announcement that it's going to cut back its production. Other things equal, how would that announcement impact the oil market? The market for crude oil. Like I said, now that we have studied supply and demand, we're not just going to argue in a circle the way I warned about in the beginning of the lecture. Now we're going to be able to see that the price will change and it will end up at a new resting point. First of all, let's think about the supply side. Well, let me just back up for a second. When we're doing examples like this, what you want to do originally is just draw a supply and demand curve and you have your original price and quantity. Now you want to think through what will that change in our thought experiment have on supply and or demand and then move the curves accordingly and then see if the answer pops out. For this example, if we have the supply and demand for oil and then we say that OPEC announces it's going to cut back production, what do we do? Let's think about the supply side first. Are we going to move that curve? Well, the answer is yes. It's almost obviously yes. It would be hard to even walk through it because we're telling you that the suppliers are going to reduce how much they're pumping. One way of thinking about it is the original announcement, they were saying or at the original scenario for various hypothetical prices, what was OPEC's quantity going to be and so it's like they're saying we're going to produce a lot less per day at those various hypothetical prices. The whole supply curve shifts to the left. That's what it means to say that supply has been reduced as you shift it to the left. Now looking at the demand side, what are we going to say about that? Don't be confused here. We are going to change how much oil is actually demanded. The quantity demanded is going to change in this example. But demand itself is not going to change. So this is a crucial distinction that I really want to make sure you get. It's the distinction between a shift in demand and a shift in the quantity demanded. In terms of the graphical depiction, it's really easy to make this distinction. It's the difference of on the one hand moving along the demand curve versus moving the demand curve itself. So what I'm going to argue is the fact that OPEC announces they're going to cut back on their production, that really doesn't affect the demand for oil. When you're thinking of all the different reasons that people might have for buying oil, the announcement from people in OPEC doesn't really impact that much. And so I wouldn't expect the demand curve itself to move around. You could get into some real esoteric thoughts about why it might. But for the most part, demand itself would not shift in response to the OPEC announcement. If you're a motorist in the grand scheme of things, you don't really care directly about how many barrels of oil Saudi Arabia is pumping. The way you do care is because it will affect the price, but that's an indirect mechanism. The demand curve already captures that. The demand curve already captures the fact that as oil gets more expensive, people consume fewer barrels of oil. So there's no reason for the curve itself to move just based on the OPEC announcement. So if you buy that so far, what does that mean in terms of our diagram? What it means is now, instead of just having that generic S for the supply curve, we'll put a one on it and then we'll draw a new supply curve to the left in S2 to show that that moved. But we'll just leave that demand curve the way it is because we're going to say demand isn't really going to move around appreciably because of the OPEC announcement. So demand is the same. So now with those standard supply and demand curves, with demand downward sloping and the supply curves upward sloping, you can see that shifting the supply curve to the left will have two effects. It will push up the market clearing price. You can have it from P1 to P2 and it will push down or shift to the left the market clearing level of output from Q1 to Q2 where Q is quantity. So Q2 will be to the left of Q1. So to be clear, let's just do a post game show on this little scenario. When I said the novices when they're talking about this kind of thing, they'll argue in a circle and they'll say, oh, OPEC cuts production. So prices go up because the supply went down. But then the higher price, people demand less and so then the price goes down. That's not what's happening here. You can see, yeah, the supply shifted left that pushed up the price and at the higher price the quantity demanded went down. But demand didn't go down. The demand curve itself stayed put. We just moved along the demand curve and so that's why we were done. We can just say, yep, supply shifted left, the price went up and at that higher price people demanded fewer units and then we're done. So the final resting point has a higher world price for crude oil and a lower quantity both supplied and demanded.