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 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 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 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