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Lec 2 Demand and Supply

# Lec 2 Demand and Supply - 1 Demand and supply Question to...

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1 Demand and supply Question to class: (1) How many of you have gone to a store this year to buy apples and was unable to do so? I.e. to your surprise, the store ran out of apples. So you be surprized that all the stores which you went to had apples for sale? How does this happen? Do they produce apples all year round in Toronto? (2) How many of you have gone to a movie theater this year and found that the show was sold out? The study of economics can be broken down into two steps. 1. Individual optimization. 2. Social or market equilibrium. Consider the competitive market for apples. Broadly, there are two types of agents. Consumers buy apples and producers produce and sell apples. In the study of individual optimization, consumers take their own incomes, prices of apples and other consumer goods as given (exogenous). Producers take the price of apples, and the prices of factors of production - land, labor and capital - as given (exogenous). So given prices and incomes, each consumer decides how many apples to buy (endogenous), and each producer decides how many to produce and sell (endogenous). The important outcome of the analysis is to determine for each agent, how much the agent will buy or sell (endogenous choice) for each level of the exogenous variables. E.g. lets hold other exogenous variables constant, and consider two di/erent prices for the price of apples, high (50± c) or low (25± c) per apple. We want to know, for each consumer, how many apples they will buy when the price is high versus when it is low. We also want to know how many apples will producer supply when the price is high versus when it is low. variation transitory or permanent? Individual optimization take the price of apples as given (exogenous). What happens if given a price of apple, the total number of apples con- sumers want to buy is not equal to the total number of apples which pro- ducers want to sell? How is the equilibrium price of apples determined? How many apples are produced and consume in Canada, the world? This is the study of market equilibrium. In other words, At the level of the market (or industry), the price of apples observed in the market and the total quantity of apples bought and sold are endogenous. 1

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What are exogenous variables at the market or industry level? E.g. consumer incomes, prices of other goods or factors or production, production technology, productivity shocks (e.g. good versus bad weather for growing apples, government policies such as taxes and quotas). 2
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Lec 2 Demand and Supply - 1 Demand and supply Question to...

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