Supply and Demand
Behzad Azarhoushang
Outline
• 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
Explaining Prices and Quantities
Three main modes of investigation
1- 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 thought
3- 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)
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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)
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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
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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 forces
How 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 Analysis
1-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 )
Topics in Market Analysis
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
Distingushing three forms of insufficency in supply
Considered a
Always
Related to
fundamental disappears basic human
charecterestic at market
needs?
of the world? equilibrium?
Scracity
Yes
No
No
Shortage
No
Yes
No
Inadequacy
No
No
Yes
Topics in Market Analysis
3- Percison Vs. Accuracy
Model 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?
Explaining Real-World Prices and
Quantities
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
Thanks for your attentions!