Реферат Supply and demand

>Contents

>Introduction

>Supply anddemand

>Conclusion

>Literature


>Introduction

>Inmicroeconomictheory, thetheory ofsupply anddemandexplains how theprice andquantity ofgoodssold inmarketsaredetermined.

>Ingeneralwheregoodsaretraded in amarket,prices ofgoodstend torisewhen thequantitydemandedexceeds thequantitysuppliedat thatprice,leading to ashortage, andconversely thatpricestend tofallwhenquantitysuppliedexceeds thequantitydemanded.Thiscauses themarket toapproachanequilibriumpointatwhichquantitysuppliedisequal to thequantitydemanded.Priceisthusseenas afunction ofsupplycurves anddemandcurves.

Thetheory ofsupply anddemandisimportant in thefunctioning of amarketeconomy in that itexplains themechanismbywhichmostresourceallocationdecisionsaremade.

Thetheory ofsupply anddemandisusuallydevelopedassuming thatmarketsareperfectlycompetitive.Thismeans thattherearemanysmallbuyers andsellers,each ofwhichisunable toinfluence theprice of thegood onitsown.


>Supply anddemand

 

1. Atheory ofprice

>Whatis it? Thetheory ofsupply anddemandis atheory ofprice andoutput incompetitivemarkets.

AdamSmithhadargued thateachgood or servicehas a ">naturalprice."If theprice (ofbeer,forexample),wereabove thenaturalprice,thenmoreresourceswouldbeattractedinto thetrade (>brewing, in theexample), and thepricewouldreturn toits ">natural"level.Converselyif thepricebeganbelowits ">natural"level.

Themoderntheory ofsupply anddemanddiffersfromSmith'stheory insomeimportantways.Economistshavemadesomeprogress in the last 200years, andgreateconomistssuchas JohnStuartMill andAlfredMarshall (andmanyothers)haveplayedtheirpart in thegrowth of themoderntheory ofsupply anddemand.Nevertheless, thetheory ofsupply anddemandis themodernexpression ofSmith'sgreatinsightabout "thenaturalprice."

>Tomake along storyshort,beforeabout the1850'smosteconomistsaccepted theLaborTheory of Valueas thetheory of the ">naturalprice."Butthereweresomecases itdidnotapply to:internationaltrade,forexample. JohnStuartMillsuggested a ">supply anddemand"solutionforprices ininternationaltrade. Othereconomistsextended it toapply toprices ingeneral.

>Unlike the ">naturalprice," along-runtheoryonly, thetheory ofsupply anddemandapplies in theshortrunaswellas thelong.

2.Analysis ofMarkets

 

>Ourapproach tomarkettheorywillbefirstanalytic andthensynthetic.To ">analyze"somethingis totake itapartintoitscomponents.Commonsensetellsus thatcompetitivemarketsworkthroughaninteraction of ">supply anddemand."AlfredMarshallcompared thesupply anddemandsides to the twoblades ofscissors --onewon'tcutbyitself. Youhave tohaveboth.

>Accordingly,wewillfirst ">analyze"competitivemarkets,bydiscussingdemand andsupplyseparately.Thenwewilltry toputthembacktogether (>synthesizethem) inorder tounderstand theworking ofcompetitivemarkets.

>Thus, in the nextfewpages,wewill lookat

·demand

·supply

·equilibrium ofdemand andsupply

3.SimpleSupply andDemandcurves

>Thiscanbeillustratedwith thefollowinggraph:

Thedemandcurveis theamount thatwillbeboughtat agivenprice. Thesupplycurveis thequantity thatproducersarewilling tomakeat agivenprice.Asyoucansee,morewillbepurchasedwhen thepriceislower (thequantitygoes up).On theotherhand,as thepricegoes up,producersarewilling toproducemoregoods.Wherethesecrossis theequilibrium.Thiswillcreate aprice ofP and aquantity ofQsince thatiswhere the twolinescross.

>In thefigurestraightlinesaredrawninstead of themoregeneralcurves.SeealsoPriceelasticity ofdemand.

 

4.Demandcurveshifts

>Whenmorepeoplewantsomething thedemandcurvewillshiftright.Anexample ofthiswouldbemorepeoplesuddenlywantingmorecoffee.Thiswillcause thedemandcurve toshiftfrom theinitialcurveD0 to the newcurveD1.Thisraises theequilibriumpricefromP0 to thehigherP1.Thisraises theequilibriumquantityfromQ0 to thehigherQ1.Inthissituation,wesay thattherehasbeenanincrease indemandwhichhascausedanextension insupply.

>Conversely,if thedemanddecreases, theoppositehappens.If thedemandstartsatD1, andthendecreases toD0, thepricewilldecrease and thequantitysuppliedwilldecrease - acontraction insupply.

 

5.Supplycurveshifts

>When thesupplierscosts change thesupplycurvewillshift.Forexample,ifsomeoneinvents abetterway ofgrowingwheat,then theamount ofwheat thatcanbegrownfor agivenpricewillincrease.Thiscreates ashiftfrom aoriginalsupplycurveS0 to a newlowersupplycurveS1 - adecrease insupply.Thiscauses theequilibriumprice todecreasefromP0 toP1. TheequilibriumquantityincreasesfromQ0 toQ1as thequantitydemandedincreases -anextension indemand.Notice that theprice and thequantitymove inoppositedirections in asupplycurveshift.

>Conversely,if thesupplyincreases, theoppositehappens.If thesupplycurvestartsatS1, andthenshifts toS0, thepricewillincrease and thequantitywilldecreaseasthereis acontraction indemand.

 

6.Effects ofbeingawayfrom theEquilibrium Point

>If thepriceissettoo high,suchasatP1,then thequantityproducedwillbeQs. ThequantitydemandedwillbeQd.Since thequantitydemandedislessthan thequantitysuppliedtherewillbe aoversupply problem.If thepriceistoolow,thentoolittlewillbeproduced tomeetdemandat thatprice.Thiswillcause aundersupply problem.Businessesresponses toboththeseproblemsrestores thequantity and theprice to theequilibrium.In thecase ofoversupply, thebusinesseswillsoonhavetoomuchexecessinventory,sotheywilllowerprices toreducethis.


 

7.VerticalSupplyCurve

>Itissometimes thecase that thesupplycurveisvertical.Forexample, theamount ofland in the worldcanbeconsideredfixed.Inthiscase,nomatter howmuchsomeonewouldbewilling topayforonemoreacre ofland, theextracannotbecreated.Also,evenifnoonewanted all theland, itstillwouldexist.Theseconditionscreate averticalsupplycurve.In theshortrunnearverticalsupplycurvesareevenmore common.Forexample,if theSuperBowlis nextweek,increasing thenumber ofseats in thestadiumisalmostimpossible. Thesupply ofticketsfor thegamecanbeconsideredvertical inthiscase.If theorganizers ofthiseventunderestimateddemand,then itmayverywellbe thecase that theprice thattheysetisbelow theequilibriumprice.Inthiscasetherewilllikelybepeople whopaid thelowerprice whoonlyvalue theticketat thatprice, andpeople whocouldnotgettickets,eventhoughtheywouldbewilling topaymore.Ifsome of thepeople whovalue theticketslesssellthem topeople whoarewilling topaymore (>i.e.scalp thetickets),then theeffectivepricewillrise to theequilibriumprice.

Thebelowgraphillustrates averticalsupplycurve.When thedemand 1is ineffect, thepricewillp1.Whendemand 2isoccurring, thepricewillbep2.Notice thatatbothvalues thequantityisQ.Since thesupplyisfixed,anyshifts indemandwillonlyeffectprice.


 

8. Othermarketforms

>In asituation inwhichtherearemanysellersbut asinglemonopolysuppliercanadjust thesupply andprice of agoodatwill, themonopolistwilladjust thepriceso that hisprofitismaximisedgiven theamount thatisdemandedat thatprice. Asimilaranalysisusingsupply anddemandcanbeappliedwhen agoodhas asinglebuyer, amonopsony,butmanysellers.

>Wheretherearebothfewbuyers orfewsellers, thetheory ofsupply anddemandcannotbeappliedbecausebothdecisions of thebuyers andsellersareinterdependent -changes insupplycanaffectdemand andviceversa. Gametheorycanbeused toanalysethiskind ofsituation.Seealsooligopoly.

Thesupplycurvedoesnothave tobelinear.However,if thesupplyisfrom aprofitmaximizingfirm, itcanbeproven thatsupplycurvesarenotdownwardsloping (>i.e.if thepriceincreases, thequantitysuppliedwillnotdecrease).Supplycurvesfromprofitmaximizingfirmscanbevertical orhorizontal orupwardsloping.

Standardmicroeconomicassumptionscannotbeused toprove that thedemandcurveisdownwardsloping.However,despiteyears ofsearching,nogenerallyagreeduponexample of agood thathasanupwardslopingdemandcurvehasbeenfound (>alsoknownas aGiffengood).Non-economistssometimesthink thatthiswouldnotbe thecaseforcertaingoods.Forexample,somepeoplewillbuy aluxurycarbecause itisexpensive.Inthiscase thegooddemandedisactuallyprestige, andnot acar,sowhen theprice of theluxurycardecreases, itisactuallychanging theamount ofprestigeso thedemandisnotdecreasingsince itis adifferentgood.

 

9.DiscreteExample

Theabovediscussion ofsupply anddemandcanbethought of interms ofindividualpeopleinteractingat amarket.Suppose thefollowingpeopleexist:

>Aliceiswilling topayfor asack ofpotatoes.

>Bobiswilling topayfor asack ofpotatoes.

>Cathyiswilling topayfor asack ofpotatoes.

>Daniswilling tosell asack ofpotatoesfor .

>Emilyiswilling tosell asack ofpotatoesfor .

>Frediswilling tosell asack ofpotatoesfor .

>Therearemanypossibletrades thatwouldbemutuallyagreeable tobothpeople,butnot all ofthemwillhappen.Forexample,Cathywouldbewilling totradewithFredforanypricebetween and .If thepriceisabove ,Cathyisnotinterested,since thepriceistoo high.If thepriceisbelow ,Fredisnotinterestedsince thepriceistoolow.Ofcourse,justbecause atradeispossible,doesn'tmean itwillhappen.Each of thesellerswilltry andgetas high of apriceaspossible, andeach of thebuyerswilltry andgetaslow of apriceaspossible.

Imagine thatCathy andFredarebarteringover theprice.Fredoffersdollarsfor asack ofpotatoes.Cathyisjustaboutready toagreewhenEmilyoffers tosell asack ofpotatoesfordollars.Fredisnotwilling tosellatdollars,sohedrops out.Atthispoint,Dancanoffer tosellfor .Emilywon'tsellfor thatamountso itlookslike the dealmightgothrough.Atthispointhowever,Bobsteps in andoffersdollars.Atthispoint,wehave twopeople whoarewilling topaydollarsfor asack ofpotatoes (>Cathy andBob),butonlyoneperson (>Dan)willing tosellfordollars.So thepricemustgo upbecauseCathy andBobarebothwilling topaymorethandollars.Assoonas thepricehitsdollars,Emilywillbewilling tosellsotherearenow twopeoplewilling topaydollars and twopeoplewilling tosellatdollarsso thetradescanhappen.ButwhataboutFred andAlice?Well,Fred andAlicearenotwilling totradewitheachothersinceAliceisonlywilling topay andFredwillnotsellforanyamountunder .Alicecan'toutbidCathy orBob totry andpurchasefromDansoAlicewillnotbeable toget atradewiththem.Fredcan'tunderbidDan orEmilysohewillnotbeable toget atradewithCathy.Inotherwords, astableequilibriumhasbeenreached.

Asupply anddemandgraphcouldalsobedrawnfromthis. Thedemandwouldbe:

1personiswilling topay (>Cathy).

2peoplearewilling topay (>Cathy andBob).

3peoplearewilling topay (>Cathy,Bob, andAlice).

Thesupplywouldbe:

1personiswilling tosellfor (>Dan).

2peoplearewilling tosellfor (>Dan andEmily).

3peoplearewilling tosellfor (>Dan,Emily, andFred).

>Andhereis thegraphs:


10.Application:Subsidy

Asubsidyis apaymentfrom thegovernment to afirm orindividual in the privatesector,usually on thecondition that theperson orfirm thatreceives thesubsidyproduce ordosomething, or toincrease theincome of apoorperson.

>Forourexample,wewillthink of asubsidyfor theproduction ofcorn. (>Somecountrieshavepaidsubsidiesfor theproduction ofgrain inorder tomake foodcheaperforpoorpeople).Letussuppose thegovernmentpayscornfarmers adollarperbushel ofcorn, inaddition towhateverpricetheyget in themarketplace.Figure 11shows thesupply anddemandforcorn. Asubsidyperunit ofproductionworksprettymuchlikeanexcisetax,except inreverse.Inparticular,wecan lookat the changefrom thepoint ofvieweither ofbuyers orsellers.Inthisexample,wewill lookat thesubsidyfrom thepoint ofview of thebuyers.Fromtheirpoint ofview, thesubsidyisanincrease insupply.

ASubsidy

>Accordingly, thefigureshows thesubsidyshifting thesupplycurve to theright,fromS1 toS2. Theverticaldistanceis theamount of thesubsidy:onedollarperbushel.Demandis D,asusual.WithsupplyS1 --before thesubsidyisgiven -- themarketequilibriumpriceisp1 and theequilibriumproductionisQ1.WithsupplyS2 --when thesubsidyisgiven -- themarketequilibriumpriceisp2 and theequilibriumproductionisQ2.Wemayconclude that asubsidyperunit ofproductionreduces themarketprice (>thoughnotquiteby thefullamount of thesubsidy) andincreases theproduction of theitemsubsidized.


>Conclusion

>Howarewe tounderstand themarketfor agoodsuchasbeer,potatos, or cheese?Commonsensecantellus that thesupply,demand,price andquantityproducedareinterdependent,but howdotheydepend ononeanother? Themostgeneral andimportantanswer to thatquestion inmoderneconomicsisencapsulated in the ">Supply andDemand"model.

>Wehavedefined ">demand"as arelationbetween theprice of thegood and thequantityconsumerswant tobuy.Similarly,wehavedefined ">supply"as therelationbetween theprice and thequantity thatproducerswant tosell.Whenweputthese twoconceptstogether,weidentify themarket ">equilibrium"with theprice andquantityat theintersection of thedemand andsupply relations -- thatis, apricejust highenough thatquantitydemandedisequal toquantitysupplied, and thequantitycorresponding to thatprice.

>In awidevariety ofhistoric andcurrentexamples,wefind thatwecanexplainchanges inquantities andpricesas theequilibria ofsupply anddemand,withshifts indemand or insupplycausingchanges inprice andquantity. Thechanges inprice andquantityarecoordinated inways thatcanbeunderstood andpredicted,ifweunderstand thetheory ofsupply anddemand.


>Literature

1. APAPO System AdministrationbyLianeWill.PrinciplesforeffectiveAPOsystem Management. SAPpress. 2007.

2.LisaKnight,MeadowGladeElementary,BattleGround,WA.Supply anddemand. 2004.

3.McConnelC.R.,BrueS.L.Economics:Principles,Problems andPolicies.-14thed.-Boston etc. :Irwin:McGraw-Hill, 1998.

4.SamuelsonP. A.,Nordhaus W. D.Economics.- 16thed.-Boston etc.:Irwin:McGraw-Hill, 2005.

5.SlavinS.L.Economics: aSelf-TeachingGuide. - New York etc.:Wiley, 1988.

6.Walstad W. B.,Bingham R. З.StudyGuide toaccompanyMcConnell andBrueEconomics. - 14thed. - Boston etc.:McGraw-Hill, 2003.


Схожі реферати:

Навігація