Supply and Demand from a Neoclassical Perspective

Transcription

1 CHAPTER 3: uly and emand from a Neoclassical Persective ummary In this chater we will look at the neoclassical concet of the market, which involves the marginalist concets of demand and suly under conditions of erfect or ure cometition. asan Fayazmanesh What is a market? ef. Market: is a lace where buying and selling takes lace. A Marshallian Market (Marshallian scissors ) Price er unit of good x uly of good X According to your text, a market is a grou of buyers and sellers with the otential to trade. e From the neoclassical ersective, a market is reresented by a Marshallian grah (due to Alfred Marshall, Princiles of Economics, 189): e emand for good X uantity of good X Functions of a Market A market in this theoretical ersective lays 3 functions: 1) rice determination 2) distribution of income between 3 factors of roduction : land, labor and caital. 3) Allocation of resources Note: In this chater we are dealing with erfectly or urely cometitive markets. ef. Perfect cometition: a market characterized by: 1) Many consumers and roducers, so many that no one acting alone can influence the market rice. 2) Homogenous goods, all goods within an industry are identical (no brand names). 1

2 3) Free entry and exit of firms into and out of industries, no cost attached. 4) Perfect knowledge, everyone knows everything about the markets. emand schedule The story of the demand schedule in neoclassical economics is told in different ways: One way is the Walrasian auctioneer, which goes back to Leon Walras (Elements of Pure Economics, 1874). The auctioneer goes to where the buyers (consumers) are and calls out rice er unit of a good (let us say oranges) and gets resonses in terms of quantities of goods (oranges) demanded. What is microeconomics? emand chedule Price er unit of oranges () uantity of oranges demanded ( d ) ($/unit) (Number of units)

3 Note: Price er unit () is the indeendent variable. uantity demanded ( d ) is the deendent variable. d is a function of : d = f() In our case: d = Grahically: (rice er unit) d (quantity demanded) Two concetual roblems: Grahically: 1) If the quantity demanded is a function of rice er unit, then the axes are wrong! d The source of the roblem: The grah is due to Marshall, who assumed = f(). The concet of demand is due to Walras, who assumed d =f() f(). 2) A continuous line imlies that goods and rices are infinitesimally divisible! This may work for sugar, which Marshall used as an examle, but it does not work for most goods! 3

4 The Law of emand Everything else remaining the same (ceteris aribus), quantity demanded increases as rice er unit decreases. What are the factors that must remain the same? Or What other factors, beside rice er unit, could influence the quantity demanded? Textbook factors that influence quantity demanded: 1) Tastes and references (T) Notationally, this means that: d = f (, T, I, W, PR, E, NB). 2) Income (I) 3) Wealth (value of assets such as a home, stocks and bonds, etc.) )(W) 4) Prices of related goods (PR) 5) Exectation (E) 6) Number of buyers (NB) Change in emand or hift in emand : What would haen to the demand curve if a variable other than rice changes? A favorable change in taste A: The entire demand curve would shift or change, or as neoclassicals say demand changes. Let us change each variable: d 4

5 A favorable change in taste Meaning of the shift: d = f (, T, I, W, PR, E, NB). emand increases Price is held constant at a random rice * P * d d 1 Consumers exect higher rices P Consumers exect higher rices emand increases d d The number consumers decreases The number of consumers decreases emand decreases d d 5

6 Income increases The shift deends on the tye of goods: ef Normal goods: as our income increases, our consumtion of them would increase as well. e.g., most goods. ef Inferior goods: as our income increases, our consumtion of them would decrease. e.g., macaroni and cheese, secondhand items, otatoes, etc. d Inferior goods are sometimes called Giffin goods Income increases (Normal good) Income increases (Inferior good) emand increases emand decreases d d Wealth increases: same as income increases Wealth increases (Normal good) emand increases d d 6

7 Wealth increases (Inferior good) Price of related good increases emand decreases d d ome goods are related: ef ubstitute goods: used interchangeably. e.g., tea and coffee, sugar and artificial sweeteners, oranges and tangerines. Price of the substitute good increases tea tea Price of coffee increases ef Comlementary goods: used jointly. e.g., shoes and shoelaces, bread and butter, tennis rackets and tennis balls, ketchu and hamburgers. tea d tea Price of the substitute good increases P tea emand increases Price of comlementary good increase shoelaces shoelaces Price of shoes increases shoelaces Price of coffee increases d tea d shoelaces 7

8 Price of the comlementary good increase shoelaces emand decreases Note the different exressions: 1) uantity demanded increases : Price must decrease. 2) emand increases : A factor other than rice must change. Price of shoes increases d shoelaces uantity demanded increases emand increases tea d Price of coffee increases d tea uly schedule The story of the suly schedule is similar to the demand schedule: The Walrasian auctioneer now goes where the roducers (sellers/suliers) are and calls out rice er unit of a good (let us say oranges) and gets resonses in terms of quantity of goods (oranges) sulied. What is microeconomics? uly chedule Price er unit of oranges () uantity of oranges sulied ( s ) (Number of units) ($/unit)

9 Again, rice er unit () is the indeendent variable. uantity demanded ( s ) is the deendent variable. s is a function of : s = f() In our case: Grahically: (rice er unit) 7 s = s (quantity sulied) The Law of uly What other factors, beside rice er unit, influence quantity sulied? Everything else remaining the same (ceteris aribus), the quantity sulied increases as rice er unit increases. Textbook factors that influence quantity sulied 1) Cost of inuts (CI) This means that: s= f(, CI, T, PRG, E, N). 2) Technology (T): ef. Technology : The way inuts are ut together 3) Prices of related goods roduced (PRG) 4) Exectation (E) 5) The number of sellers (N) 9

10 Change in uly or hift in uly : What would haen to the suly curve if a variable other than rice changes? A: The entire suly curve would shift or change, or as neoclassicals say suly changes. Cost of inuts increases Let us change each variable: s Cost of inuts increases uly decreases Meaning of the shift: s= f (, CI, T, PRG, E, N) Price is held constant at a random rice * P* s 1 s Technological imrovements Technological imrovements uly increases s s 1

11 Producers exect higher rices for roducts Producers exect higher rices uly decreases s s Number of roducers increases Number of roducers increases s s Number of roducers increases uly increases Price of a related good roduced increases uose farmers roduces both wheat and corn. Assume the rice of wheat rises. s 11

12 Price of wheat increases Price of wheat increases corn corn P corn uly of corn decreases corn corn s corn s corn Note, again, the different exressions: 1) uantity sulied increases : Price must increase. 2) uly increases : uantity sulied increases P 2 A factor other than rice must change s Number of roducers increases uly increases Market demand, market suly and equilibrium rice The Walrasian auctioneer now uts the demand and suly schedules together. s 12

13 Market : Market in Equilibrium e is called the equilibrium rice : uly of good X At e market clears: d = s e is also called the market clearance rice. e emand for good X e is the quantity at equilibrium rice. d = s e d / s / We often use and for equilibrium rice and quantity. Market in Equilibrium: Our revious examle uly of good X Market in disequilibrium: Price is either above e or below e. P e =4 emand for good X 4 = d = s =4 Market in disequilibrium uly of good X Market in disequilibrium: A urlus uly of good X 1 1 surlus urlus= s - d emand for good X emand for good X d surlus < s 13

14 Market in disequilibrium: A hortage uly of good X Equilibrium Price and a Change in emand Consider, ceteris aribus, a change in demand and its effect on the equilibrium rice and quantity. hortage= d - s 2 shortage emand for good X s shortage < d Income increases (inferior good) Income increases (inferior good) 1 1 Price of the substitute good increases Price of the substitute good increases

15 Equilibrium Price and a Change in uly Technological imrovement Consider, ceteris aribus, a change in suly and its effect on the equilibrium rice and quantity. Technological imrovement Price of corn roduced by the farmers will increase wheat 1 wheat 1 Price of corn roduced by the farmers will increase Equilibrium Price and a Change in uly and emand wheat Consider changes in both suly and demand simultaneously and their effect on the equilibrium rice and quantity. 1 wheat 1 15

16 Price of comlementary good decreases and rent of land falls uantity at equilibrium definitely increases We can t tell what haens to equilibrium rice: e is indeterminate. Price of comlementary good decreases and rent of land falls Price of comlementary good decreases and rent of land falls 1 1 = 1? Price of comlementary good decreases and rent of land falls Both roducers and consumers exect higher rices

17 Price at equilibrium definitely increases. Both roducers and consumers exect higher rices We can t tell what haens to equilibrium quantity: e is indeterminate = 1? 1 Both roducers and consumers exect higher rices Both roducers and consumers exect higher rices The concets of rice floor or rice suort and rice ceiling Price floor or rice suort ef. Price floor: any rice set above the equilibrium rice ef. Price ceiling: any rice set below the equilibrium rice F 17

18 Price floor or rice suort Price ceiling surlus F urlus: s - d c d surlus < s Price ceiling Political conclusion Laissez faire! Leave the markets alone. c shortage hortage: d - s They are self-adjusting. Any government action is uncalled for. s shortage < d Next sto: Chater 5! 18