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Demand means how much of a product consumers choose to buy at a particular price. And it depends on
the benefits from consumption. In many ways, demand is similar to supply, but it's sort of backwards in a
number of ways as you'll see. So this graph shows the total benefits from consuming a product. This is the
total benefit received by a consumer. Economists usually refer to this as utility. And you can see that as
the quantity of consumption of a good increases then the amount of benefit received by consumers
increases. But we usually expect it to increase at a decreasing rate so it's flattening off as the quantity
goes up. So the total benefit increases at a decreasing rate, meaning that the slope of the line gets flatter
as we go to higher quantities. And the slope this time is the marginal benefit. Previously in supply, the
slope was the marginal cost. This time we're looking at the slope being the marginal benefit. And again,
we could graph it. So the slope's very high initially and it gets lower as we go to higher quantities. So if we
graph that, we get a line like this, the marginal benefit curve. The marginal benefit shows how much
consumers are willing to pay for one more unit of the product. How much benefit they get from one
more unit of consumption. Now to maximize benefits, consumers should purchase the quantity of the
good at which the marginal benefit that they receive equals the purchase cost of the good. So this means
that the marginal benefit curve indicates the amount demanded at a given price. So in other words, the
marginal benefit curve corresponds to the demand curve. So just like we saw the marginal cost curve
corresponding to the supply curve, the marginal benefit curve corresponds to the demand curve. So in
this graph, I've renamed that marginal benefit curve to the demand curve. And it shows us that the higher
the price, the less product consumers choose to buy. Now let's bring the two together, the supply and the
demand curve. And the point where the supply and demand curves cross or intersect is called the market
equilibrium. And it's associated with an equilibrium price, which I've labeled Pe, and an equilibrium
quantity, Qe, that are labeled on the graph. Now in reality, of course, the market price fluctuates around
this equilibrium level, but it doesn't stray too far away from that for too long. If the quantity produced is
too high, then there's overproduction and price falls because in order to sell all of that product, the price
has to be dropped or consumers aren't willing to buy that much. So the demand curve causes the price to
fall. And that means then farmers will cut production due to the supply curve because if the price has
fallen so that makes them want to produce less. On the other hand, if the quantity produced is too low,
then the price rises because consumers are competing with each other to get access to this product so
they bid the price up, and then that encourages farmers to increase their production. So either way, if
we're too high, it comes down; if it's too low, it comes up. Sooner or later, we end up in the vicinity of
that point where the supply and the demand curve intersect. We saw in a previous segment this graph of
wheat prices falling. So that explanation I've just given of supply and demand, what that means is that at
each point over time as we move down this line, the point where the supply and the demand curve were
intersecting was changing. It was falling. And that's why the price fell at the time. So let's look at that in a
bit more detail. So we know over time that the demand for agricultural products has increased. It's
increased because of growing population and economic growth as well. People having more wealth and
therefore, buying more products. But also, we've seen supply increasing. We've had increasing areas of
agricultural land area-- although not so much recently, but historically that was the case-- and increasing
productivity of agriculture. Farmers producing more product for a given level of input. And although
supply and demand have both been increasing, overall, supply has increased more rapidly than demand.
Let's see that in a graph. This shows a supply and demand curve in an early period when the intersection
point was at a relatively high price. And then after a period, the supply curve moved to the right and the
demand curve moved to the right, but the supply curve shifted further so that the point where the two
new curves intersect is at a lower price. So this is at a later time. They've both moved to the right, but the
point where they intersect is now lower. You can see that from this graph, which has both of them on,
both sets of supply and demand curves. And this was sort of a long-term process. Over time, supply and
demand both moved to the right, but supply moved more quickly so price fell. Now in the reading for this
week, one of the readings, there's an article about the supply and demand for Australian wool. And this
reading highlights what can go wrong if people make decisions about how to set prices for agricultural
products, but don't understand supply and demand. You already know enough about supply and demand
not to make the disastrous decisions that were made in the Australian wool market in the 1980s and
1990s. You might not think you understand all that much about supply and demand yet, but believe me,
you know enough to avoid some really terrible decisions that were made. And we'll hear more about
those in a later segment in a future week. In summary, marginal benefit equals the slope of the total
benefit curve and the marginal benefit decreases with increasing quantity. The marginal benefit curve
corresponds to the demand curve and so the demand curve is downward sloping. When we bring supply
and demand together, the market equilibrium price is where supply and demand are equal or intersect.
And the supply and demand model that we've seen helps to explain many changes in agriculture. We've
used it to explain why price fell over time. In a future segment, we'll use it to explain various other factors
and various other changes that have been observed.

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