“It is easy to train economists. Just teach a parrot to say Supply and Demand”
While I was doing my degree in literature, it was my favorite phrase in the company of my economics friends. They always tried to find some tricky expression like it but often failed. At that time I didn’t know that I will have to study economics one day and learn these three words but...
...not like a parrot (sorry friends!)
Economics professors don’t teach these three words like that.
They describe the whole market mechanism with a simple graph. Demand and supply model is backbone of modern economics and being taught in all elite universities of the world. Whether you study macro or micro economics, your lessons plan starts with this model.
Demand and supply is as important to the managerial economics as to other branches of economics. In fact we can’t understand underlying managerial principles without knowing this model and its implications.
That’s why, this section of the website is going to discuss and allow you to contribute on different aspects and exceptions to this model.
Robert Ernest Hall, Marc Lieberman say in “Microeconomics: Principles and Applications”:
“Supply and demand is just an economic model – nothing more and nothing less. It’s a model designed to explain how prices are determined in certain types of markets”.
In our managerial lives, the most difficult decisions are about prices and costs of different commodities. When we want to purchase something for our company or public, we need not only to compare but also analyze different elements affecting prices. When we want to sell something, we have not only to keep in view the costs but also prices and quantity of the similar kind of products already being supplied in the market. We have to fix the prices at a level that can generate economic profit otherwise our company may close and terminate our services.
It means, the model is very important for managers, public or private.
Traditionally, law of demand and supply is based upon equilibrium point which is result of intersection of demand and supply curves. This point explains two things:
i) What will be price of the product that sellers want to pay?
ii) What quantity a producer will like to supply at the offered price and earn economic profit?
But it is very simple view.
Economists like Robert S. Pindyck & Daniel L. Rubinfeld, Stigler, Landsburg, and Baumol and Blinder have discussed this model in length.
Robert S. Pindyck and Daniel L. Rubinfeld, while discussing basics of supply and demand say:
“Supply demand analysis is a fundamental and powerful tool that can be applied to a wide variety of interesting and important problems. To name a few:
• Understanding and predicting how changing world economic conditions affect market price and production.
• Evaluating the impact of government price controls, minimum wage, price supports, and production incentives.
• Determining how taxes, subsidies, tariffs, and import quotas affect consumers and producers.”
This excerpt from Robert S. Pindyck and Daniel L. Rubinfeld proves that supply and demand model had wide implications. Almost all kind of managers need to understand this model as:
1- Being manager of a company which produces products in local as well as international market, it is most important to learn how prices are governed in the global economy.
2- Being a public or private manager, we may need to learn whether the government should control prices or not. If at all the prices are controlled by the government what kind of results you may expect.
3- Minimum wages are favorite tool of most of the governments. What impact they can bring on production, costs and efficiency of allocation of resources.
4- Similarly, we can’t understand affects of price support, subsidy, ceiling and floor pricing, quota, taxes, tariffs etc without understanding supply and demand model.