8Lecture

8Lecture - LECTURE 8 DEMAND, SUPPLY, AND THE PRICE SYSTEM...

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LECTURE 8 DEMAND, SUPPLY, AND THE PRICE SYSTEM Lecture 7 presented the concept of supply as a scientific subject of analysis, and we made assumptions that enabled us to begin the discussion of supply within the context of a specific market: the market for pizza in Tempe. We used casual empiricism to bound the supply of pizza per week in the Tempe pizza market and assumed that the average weekly supply by our 11 suppliers amounted to 15,000 pizzas per week, at an average price of $10 per pizza. We then developed a list of factors that, if they changed, would change the number of pizzas supplied in this market per week. You should now review the six determinants of supply discussed in the posted Lecture 7 when I used Sonny’s farm as a typical firm supplying an economic good. DETERMINANTS OF SUPPLY PRICE OF THE GOOD PRICES OF RESOURCES USED IN PRODUCTION NUMBER OF PRODUCERS IN THE MARKET CHANGES IN TECHNOLOGY PRICES OF SUBSTITUTES IN PRODUCTION EXPECTATIONS As we did with the demand model, we can now further formalize the supply model. 1 First, we must decide which of the factors affecting the number of pizzas supplied per week is the most important factor. This is an empirical question. The way a scientist would answer the question is to ask a different question: If we allow each of the factors to change by, say, ten percent, one at a time, which of these changes would cause the greatest percentage change in the supply of pizzas per week? The answer to this question might vary from economic good to economic good. However, for most goods, the answer is 1 Those of you that study hard will notice that the following discussion seems like déjà vu all over again, to quote Yogi. This is because I took Lecture 7, and went through and changed every “demand” I found to “supply”.
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“the own price.” That is, if we let the price of pizza, prices of resources used in pizza production, number of producers in the market, technology, the prices of substitutes in production, and expectations concerning the future price of pizza each change by ten percent in our market, one factor at a time, from which determinant of supply would we see the largest percentage change in the supply of pizza per week? It is an empirical question that inevitably is answered, “The most important determinant is the price of pizza.” Hence, when we create our model of supply and draw a graph of the determinants of supply, to begin we graph the amount supplied in relationship to the price of pizza. See Figure 8-1. 2 Figure 8-1 shows that if the price of pizza is $10 per pizza, 15,000 per week will be supplied in our Tempe market. (We are at point A on the line.) If the price rose to $15 per pizza, the number supplied would increase to 20,000 per week. (We move from point A on the line to point B on the line.) If the price fell to $5 per pizza, the number supplied per week would decrease to 10,000 per week. (We move from point B on the line to point C on the line.) The line labeled “S” is called a
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This note was uploaded on 03/23/2011 for the course ECN 212 taught by Professor Nancy during the Spring '07 term at ASU.

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8Lecture - LECTURE 8 DEMAND, SUPPLY, AND THE PRICE SYSTEM...

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