SUPPLY & DEMAND
(Father Guido Sarducci’s 5 Minute University
http://www.youtube.com/watch?v=kO8x8eoU3L4)
DEMAND
THE FIRST LAW OF DEMAND: DEMAND CURVES
SLOPE DOWNWARD TO THE RIGHT
THE QUANTITY BUYERS STAND READY TO BUY AT
ANY GIVEN PRICE.
WHY DO DEMAND CURVES SLOPE DOWNWARD TO
THE RIGHT? DIMINISHING MARGINAL UTILITY.
DO DEMAND CURVES EVER SLOPE UPWARDS TO THE
RIGHT? NO!
FACTORS AFFECTING DEMAND:
A CHANGE IN PRICE >>>> A MOVEMENT ALONG A
DEMAND CURVE
VS.
CHANGES IN OTHER FACTORS:
 INCOME
 TASTES (DE GUSTIBUS NON EST DISPUTANDUM)
 OTHER
CAUSES
A SHIFT OF THE DEMAND CURVE
AN IMPORTANT DISTINCTION:
1. A CHANGE IN THE QUANTITY DEMANDED (A
MOVEMENT ALONG A DEMAND CURVE)
2. A CHANGE IN DEMAND (A SHIFT OF THE
DEMAND CURVE & A WHOLE NEW CURVE)
SUPPLY
THE FIRST LAW OF SUPPLY: THE MORE YOU TRY TO
PRODUCE IN A GIVEN AMOUNT OF TIME, THE
MORE IT COSTS.
FACTORS AFFECTING SUPPLY:
 TIME
 TECHNOLOGY
 AVAILABLE FACTORS OF PRODUCTION (LAND,
LABOR, CAPITAL, ENTREPRENEURSHIP)
 RESOURCE COSTS
A SHIFT OF THE SUPPLY CURVE VS. A MOVEMENT
ALONG A SUPPLY CURVE
EQUILIBRIUM
THE PLANS OF BUYERS AND SELLERS MATCH (THIS IS
THAT SPONTANEOUS COORDINATION AND
ORDER THAT ADAM SMITH TALKED ABOUT)
DIS-EQUILIBRIUM
EXCESS DEMAND
→
PRICES RISE
EXCESS SUPPLY
→
PRICES FALL
MARKETS AS SELF-CORRECTING MECHANISMS
THE “LAW” OF ONE PRICE
THE DEFINITION OF A “MARKET” & WHY THE “LAW”
DOES NOT HOLD:
 IMPERFECT MARKETS
 TRANSACTIONS COSTS
 SEARCH COSTS
WHAT IS SOMETHING WORTH?
J.S. MILL (1848): “THE THEORY OF VALUE IS WELL
UNDERSTOOD...”
GOOFY THEORIES OF VALUE
ARISTOTLE – VALUE IS INHERENT IN THE “FIRST
CAUSE” AND IMMORTAL
ST. THOMAS AQUINAS – THE “JUST PRICE” IS THE
COST OF PRODUCTION
KARL MARX – THE “LABOR THEORY OF VALUE”
THE DEMAND CURVE AS A MARGINAL
PRIVATE BENEFIT CURVE
WHAT IT ALL BOILS DOWN TO:
“THINGS ARE WORTH WHATEVER THE MARKET WILL
BEAR”
(COROLLARY: “...WHATEVER THE SUCKER WILL
PAY...”)
THE SAME GOOD CAN HAVE DIFFERENT VALUES TO
THE SAME INDIVIDUAL
THE SAME GOOD CAN HAVE DIFFERENT VALUES TO
DIFFERENT PEOPLE
CONSUMERS’ SURPLUS
Q:
WHAT BENEFIT DOES THE CONSUMER GET FROM
CONSUMERS’ SURPLUS?
A:
THEY CAN SPEND MORE MONEY ON OTHER
STUFF.
MEASURING CONSUMERS’ SURPLUS
PRODUCERS’ (SUPPLIERS’) SURPLUS
GAINS FROM TRADE
HOW CONSUMERS’ AND PRODUCERS’ SURPLUS ARE
SPLIT
WHO PAYS A TAX?
HOW MARKETS PROMOTE
EFFICIENCY
A. DEFINING EFFICIENCY
1.
TECHNICAL EFFICIENCY: A USE OF
RESOURCES IS EFFICIENT IF MORE CANNOT
BE MADE WITH THE SAME AMOUNT OF
RESOURCES.
PRODUCTION POSSIBILITIES CURVE
2.
ALLOCATIVE EFFICIENCY: (PARETO
EFFICIENCY) NO ONE CAN BE MADE BETTER
OFF WITHOUT MAKING SOMEONE ELSE
WORSE OFF.
VOLUNTARY EXCHANGE ON EFFICIENT
MARKETS ARE, BY DEFINITION, MUTUALLY
BENEFICIAL
ALLOCATIVE EFFICIENCY MEANS
PRODUCING THE MIX OF GOODS AND SERVICES
THAT MAXIMIZES SOCIETY’S WELFARE
(THIS GETS BACK TO THE “WHO PRODUCES WHAT
FOR WHOM AND HOW” QUESTION)