Supply and Demand
What, why and for whom?
• Three Problems All Economic Systems Must
Address
– What should be produced?
– How should it be produced?
– For whom will it be produced?
• Lots of ways to do this
– Feudalism, guilds, central planning, caste systems,
participatory democratic processes, etc.
• We will focus on competitive markets
Is a focus on competitive markets
appropriate? Recent Headlines
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Millions in U.S. Subsidies Go to Dead Farmers
I.M.F. Calls for Curbing Fuel Subsidies
Sadly, Too Big to Fail Is Not Over
Uncertainty Over Fed Stimulus Leads Markets Lower
Counting the Cost of Fixing the Future
Bail outs, etc.
Supplying food to NYC
• How does the right amount of the right food get to the
right place at the right time for the right price?
– And does it?
• Food comes from around the world
• Requires land, chemicals, labor, farm machinery,
transport, processing, packaging, etc., etc., etc.
• No central authority, no central source of knowledge, no
coercion.
• Does anyone get insufficient food?
• Does anyone get too much?
Housing in NYC
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Housing shortage
Too few new units
Too few repairs
Homelessness
Is this the result of rent controls?
Food comes from around the world.
Where does the land on which to build
houses come from?
Central planning vs. the market
• Guatemala and Cuba: free market vs. socialist
dictatorships
• Guatemala
– You can buy anything you want, no lines in stores
– Short life expectancy, high illiteracy, infant mortality, malnutrition
– More disappearances (political murders) than all other LA
countries combined
– Massive aid from US
• Cuba
– Very difficult to buy anything, long lines
– Long life expectancy, low illiteracy, lower infant mortality than
NYC, low malnutrition
– Limited freedom
– Massive obstruction from US, embargo
What’s the better system?
• We should not base our economic system
on ideology, but rather on a careful
understanding of the scarce resources and
desired ends.
What system does the US use?
• How do big firms make their decisions?
– Corporations are islands of central planning in
a sea of competitive markets
• 51 of the world’s 100 biggest economies
are multinational corporations
• Corporate welfare: sole source, bail outs,
subsidies (energy, timber, mining, grazing,
agriculture)
In perfect Free-Market or Capitalist
Economic Systems
• Individual choices determine
– Which careers to pursue
– Which products to produce or buy
– When to start and shut-down a business
– Who gets what
• BUT…..
– Consumer choice is individual preferences
weighted by purchasing power
– No money = no choice
What is a market?
• A market consists of all buyers (or
potential buyers) and all sellers (or
potential sellers) of a good or service
ANNOUNCEMENT
• Once your grade has been returned on a
homework assignment, you can redo the
assignment correctly to get back ½ your
points.
• Meet with a TA to show that you
understand your errors, or else e-mail it
directly to the TA who graded it.
The Supply Curve
• A curve or schedule showing the quantity of a
good that sellers wish to sell at each price
(usually drawn as a straight line)
• Sellers must receive a higher price to produce
additional units of a product to cover the higher
opportunity costs of each additional unit
• Why are marginal opportunity costs increasing?
• Are they always increasing?
Supply curve: hamburgers in NYC
Marginal cost =
sellers reservation
price=
Lowest amount at
which seller will
produce good
What’s the supply curve for land in NYC?
Demand curve
• A schedule or graph that tells us the
quantity of a good that buyers wish to buy
at each price
• As price of a good or service goes up,
what happens to the amount you want to
buy?
• demand curve is downward-sloping
– IS THIS TRUE?
Law of Demand?
• Other things remaining the same, if the
price of a good rises, demand for that
good falls, and vice versa.
• How true is this?
– Stock markets
– Land
– Speculation
Demand curve: hamburgers in
NYC
buyers reservation price:
The largest dollar amount
the buyer would be willing
to pay for a good
Why do buyers purchase a greater quantity
at lower prices and vice-versa?
• The Substitution Effect
– The change in the quantity demanded of a
good that results because buyers switch to
substitutes when the price of the good
changes
– Do substitutes always exist?
• The Income Effect
– The change in the quantity demanded of a
good that results because a change in the
price of a good changes the buyer’s
purchasing power
Supply and demand together
Surplus and Shortage