Supply and Demand

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Supply and Demand
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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

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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?

4
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?

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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

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Whats 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.

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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 worlds 100 biggest economies are
  multinational corporations
• Corporate welfare sole source, timber, mining,
  grazing, tax cuts, agriculture

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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

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What is a market?

• A market consists of all buyers (or potential
  buyers) and all sellers (or potential sellers) of
  a good or service

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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?

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Supply curve hamburgers in NYC
Marginal cost sellers reservation price Lowest
amount at which seller will produce good
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Whats the supply curve for land in NYC?
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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

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Law of Demand

• Other things remaining the same, if the price of
  a good rises, demand for that good falls, and
  vice versa.

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Demand curve hamburgers in NYC
buyers reservation price The largest dollar
amount the buyer would be willing to pay for a
good
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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
• 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 buyers purchasing power