supply and demand behzad azarhoushang. explaining prices and quantities the thoery of supply the...
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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!
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