Theory of Demand and Supply

16547 WordsAug 29, 200967 Pages
1. Supply and Demand Economists Are a Joke? ________________________________________ A smarty-pants old story says that if you want a "learned economist," all you have to do is get a parrot and train the bird to squawk "supply and demand" in response to every question. Not fair, but ... It 's true that the "theory of supply and demand" is a central part of economics. It is widely applicable, and also is a model of the way economists try to think most problems through, even when the theory of supply and demand is not applicable. A Theory of Price ________________________________________ What is it? The theory of supply and demand is a theory of price and output in competitive markets. Adam Smith had argued that each good or…show more content…
You have to have both. Accordingly, we will first "analyze" competitive markets, by discussing demand and supply separately. Then we will try to put them back together (synthesize them) in order to understand the working of competitive markets. Thus, in the next few pages, we will look at • demand • supply • equilibrium of demand and supply First, demand. Demand ________________________________________ In economics, we need to use terms a little more carefully than they are sometimes used in ordinary discussions. In general use, "Demand" is a word that can have more than one meaning, but in microeconomics we define it more carefully so that it has only one meaning. Here is the definition: Definition: Demand Demand is the relationship between price and quantity demanded for a particular good and service in particular circumstances. For each price the demand relationship tells the quantity the buyers want to buy at that corresponding price. The quantity the buyers want to buy at a particular price is called the Quantity Demanded. The key point is to distinguish between demand (the relationship) and quantity demanded. That distinction is important for microeconomics, although people often do not make it in ordinary discussion. Why do we define demand in this specialized
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