Supply and Demand Behzad Azarhoushang

• Explaining Prices and Quantities

• The Thoery of Supply

• The Thoery of Demand

• The Thoery of Market Adjustment

• Topics in Market Analysis

• Explaining Real-World Prices and Quantities

Outline

Explaining Prices and Quantities

Three main modes of investigation1- Emperical investigation: the observation and recording of the specific phenomena of concern

Time series data: observation of how a numerical variable changes over time

2- Theoritical investigation: analysis based on abstract thought3- Historical investigation: study of past event

The Theory of Supply• Main assumptions: well-informed, decision making based on

private monetary interest, firms as only supplier, price taker and self-interest rational behaviour• Supply curve: a curve indicating the quantities that sellers are

willing to supply at various price (upward slope)• Indivdual supply• Market supply • Change in quantity supply (nonprice determinats of supply)

The availabe technology of production Resource prices The number of producers Producer expectation about future price and technology The price of Related goods and services

The Theory of Demand• Demand curve: a curve indicating the quantities that buyers

are ready to purchase at various price (downward slope)• Effective demand: the desire for a product that can be

translated into purchasing behavior• Market demand • Change in demand• Change in quantity demand (nonprice determinats of

demand) Tastes and prefernces Income and/or available assets Availabilty and prices of related goods and services Consumer expectation about future price and income Number of customers

The Thoery of Market Adjustment• Main assumption: All meets in one place, double-auction and

spot market• Surplus: a situtaion in which the quantity that sellers wish to sell at

the started price is greater than the quantity that buyers will buy at that price.

• Shortage: a situtaion in which the quantity that buyers wish to buy at the started price is greater than the quantity that sellers willing to sell at that price.

• Equilibrium: a situation of rest , in which there are no forces that create change

• Market-clearing equilibrium: a situation in which the quantity supply is equal to the quantity demanded

• Theory of market adjustment: the theory that market forces will tend to make shortages and surpluses disappear

• Market disequilibrium: a situation of either surplus or shortage

Market forces and other forcesHow markets will reach to equilibrium? Do they reach at

all?• Static model: a model that ignores time, implicity assuming that

all adjustments occur instantaneously (our assumed model)• Dynamic model: a model that takes into account the passage of

time required for changes to occur• Real world examples:

Stock market Hospitals Consumer tastes and preferences

• Market adjustment analysis can tell us that most generally, disequilibrium situations create forces that will tend to push prices toward an equilibrium level.

Shifts in supply and demand

Topics in Market Analysis1-What functions do markets perform? 2-Can we ever say

that a quantity is „too little“? 3-How much confidence should we place in the precision apparently offered by

our theoritical graphs?1- Signaling and rationing as two important function of market and markets prices

Signaling: to carry information throughout the economy which motivate economic actors to change their behavior (Perhaps in the direction of greater economic efficency)

Rationing: to determine who gets what quantity of any given resource (Government or need and luck Vs. Free market or freedom of choice )

2- Shortage, Scarcity and Inadequacy• Shortage: a situation in which willing and able buyers

(effective demand) are unable to find goods to buy at the going price (is it result of disequilibrium or delibrately created by companies? Examples?).• Scarcity: is about imbalences between what is availabe

and what people would like to have regardless of what they can afford (cando market).• Inadequacy: a situation in which there is not enough of

a good or service, provided at prices people can afford, to meet minimal requirements for human well-being.

Topics in Market Analysis

Considered a fundamental

charecterestic of the world?

Always disappears at market

equilibrium?

Related to basic human

needs?

Scracity Yes No No

Shortage No Yes No

Inadequacy No No Yes

Topics in Market Analysis

Distingushing three forms of insufficency in supply

3- Percison Vs. AccuracyModel assumptions Vs. Reality:

Same access to information, well-defined supply and demand schedules (very slow shift) and double auction

• Precise: describe something that is exact (has virtue of simplicity)• Accurate: describes something that is correct (helping

to understand real world in concrete and contexual terms)• What will be happen if we mistakley confuse

percison with accuracy?

Topics in Market Analysis

Price floors and price ceilings• Price floor: a low or agreement that puts a lower limit on

prices (revenue maximizing)• Price ceilings: a law or agreement that puts an upper limit on

prices (political forces)• Cartel: a group of producers who mutally agree to limit their

production in order to sustain a price floor (delibrately prevent market adjustment)• Price ceiling and government rationing: when prices

increase sharply and lead to acceleration of inflationary process government ration the prices by establishing a ceiling for prices (US government ceiling prices for oil from 1974-78)

Explaining Real-World Prices and Quantities

Explaining Real-World Prices and Quantities

Thanks for your attentions!