MICROECONOMICS

LAW OF SUPPLY AND DEMAND

PRINCIPLES

DEMAND COMES FIRST.

SUPPLY ADJUSTS TO DEMAND.

PRODUCTION REQUIRES TIME.

EQUILIBRIUM IS A THEORETICAL CONSTRUCTION.

THE MARKET DETERMINES PRICE AND PRODUCTION.

SUPPLY ADJUSTS TO DEMAND:

THE ECONOMY IS

DEMAND PULL.

LAW OF SUPPLY AND DEMAND

Esteem needs

achievement, status, responsibility, reputation

Self-actualization

personal growth and fulfilment

Belongingness and Love needs

family, affection, relationships, work group, etc.

Safety needs

protection, security, order, law, limits, stability, etc.

Biological and Physiological needs

basic life needs - air, food, drink, shelter, warmth, sex, sleep, etc.

MATERIAL LEVEL

Maslow’s Hierarchy of Needs

THE DEMAND CURVE

GIVEN THE INCOME,

IF PRICE RISES THEN QUANTITY DEMANDED FALLS.

THEREFORE,

THE DEMAND IS A RELATION CONNECTING PRICE AND

QUANTITY WITH

NEGATIVE SLOPE

DEMAND

P

Q

WHAT CAN SHIFT THE DEMAND CURVE?

D2

P

D

D1

THE EXOGENOUS VARIABLES

WHAT CAN CHANGE DEMAND CURVE SLOPE?

ELASTIC

INELASTIC

P

Q

POOR COUNTRY

RICH COUNTRY

Esteem needs

achievement, status, responsibility, reputation

Self-actualization

personal growth and fulfilment

Belongingness and Love needs

family, affection, relationships, work group, etc.

Safety needs

protection, security, order, law, limits, stability, etc.

Biological and Physiological needs

basic life needs - air, food, drink, shelter, warmth, sex, sleep, etc.

Maslow’s Hierarchy of Needs

ELASTICI-TIES

SUPPLY ADJUSTS TO DEMAND:

1. PROPOSING A PRICE (MARKETING).

2. DECIDING PRODUCTION.

WHICH DEPENDS ON COSTS, DEMAND

(INVENTORIES) AND COMPETITION.

WHICH DEPENDS ON PROFITS, DEMAND

(INVENTORIES) AND COMPETITION.

SUPPLY ADJUSTS TO DEMAND:

WHEN DEMAND RISES

(INVENTORIES FALL)THEN

PRICE RISES AND PRODUCTION GROWS.

SO,

THE SUPPLY CURVE IS A

POSITIVE

RELATION BETWEEN PRICE AND PRODUCTION.

SUPPLY

P

Q THE SUPPLY CURVE IS A THEORETICAL CONSTRUCTION.

WHAT CAN SHIFT THE SUPPLY CURVE?

THE COST OF PRODUCTION.

MAIS CAPITAL, MENOS PERECÍVEL

P

Y

MENOS CAPITAL, MAIS PERECÍVEL

WHAT CAN CHANGE SUPPLY CURVE SLOPE?

LESS CAPITAL PERISHABLES

MORE CAPITAL NON-PERISHABLES

INELASTIC

ELASTIC

MAIS CAPITAL, MENOS PERECÍVEL

P

Y

MENOS CAPITAL, MAIS PERECÍVEL

WHAT CAN CHANGE SUPPLY CURVE SLOPE?

LESS CAPITALPERISHABLES

MORE CAPITALNON-

PERISHABLES

AGRICULTURE

INDUSTRY

MAIS CAPITAL, MENOS PERECÍVEL

P

Y

MENOS CAPITAL, MAIS PERECÍVEL

WHAT CAN CHANGE SUPPLY CURVE SLOPE?

LESS CAPITALPERISHABLES

MORE CAPITALNON-

PERISHABLES

POOR COUNTRY

RICH COUNTRY

SUPPLY AND DEMAND: THE MARKET

BRAZILIAN CEMENT MARKET

LAW OF SUPPLY AND DEMAND

THEORETICAL EQUILIBRIUM LEVELS OF PRODUCTION AND PRICE DEPEND ON:

1. BUYERS AND SELLERS INTERACTION

2. DEMAND AND SUPPLY CURVES SHIFTS STEMMING

FROM EXOGENOUS FACTORS AND DECISIONS OF

ECONOMIC POLICY

GOVERNMENT INTERVENTION

WHAT SUPPORTS THE PRICE LEVEL IS THE DEMAND

PMIN P0

P

Q Q0

ECONOMETRICS

FIRST STAGE

GENERAL EQUATION OF THE REDUCED MODEL

Yit = Ai0 + Ai1(L)Wt + Ai2(L)Ft + it

2SLS DISTRIBUTED LAGS METHOD

CASE STUDY:THE BRAZILIAN CEMENT MARKET

2SLS METHOD - FIRST STAGE

ESTIMATED REDUCED MODEL CONSUMPTION:

Dt = 9.896 - 0.312 Wt + 30.234 Ft-1 - 2.958 D1

(5.17) (-2.91) (13.07) (-3.76)

R2 = 0.98 DW = 1.90 F (3,12) = 162.48

PRICE:

Pt = 16.791 + 1.102 Wt-2 + 11.967 Ft-1 (6.33) (6.04) (2.32)

R2 = 0.87 DW = 2.24 F (2,12) = 40.64

PRODUCTION:

Qt = 9.362 - 0.304 Wt + 31.048 Ft-1 - 2.960 D1

(4.69) (-2.72) (12.87) (-3.60)

R2 = 0.98 DW = 1.94 F (3,12) = 158.10

2SLS METHOD - FIRST STAGE

ESTIMATED REDUCED EQUILIBRIUM MODEL

consumption: Dt* = 9.896 - 0.312 Wt + 30.234 Ft

price: Pt* = 16.791 + 1.102 Wt + 11.967 Ft

production: Qt* = 9.362 - 0.304 Wt + 31.048 Ft

Pt = -1.427 + 1.001 Pt* SD: (8.51) (0.21)

R2 = 0.64

DW = 1.51

F (1,13) = 22.65

DEMAND CURVE:D*t = 14.778 - 0.288 P*t + 33.735 Ft - 2.979 D1

SUPPLY CURVE: Q*t = - 33.868 + 2.579 P*t - 3.140 Wt - 2.982 D1

2SLS METHOD – SECOND STAGE

THE BRAZILIAN CEMENT MARKET

SUPPLIERS PRICE:

P*t = 32.776 + 5.008 Wt - 51.899 E*t - 20.858 D1

SUPPLIERS PRODUCTION DECISION:

Q*t = - 25.515 + 2.428 M*t - 9.351 E*t - 6.740 D1

PRICE ELASTICITY OF DEMAND

INVESTMENT ELASTICITY OF PRODUCTION

BRAZILIAN CEMENT MARKET

ANALYSIS

REDUCED MODEL – CONTROL PANEL

P*t = CONSTANT + 1.098 Wt + 12.050 Ft

Q*t = CONSTANT + - 0.308 Wt + 31.083 Ft

BRAZILIAN CEMENT MARKET

EXAMPLE: SOURCES OF VARIATIONS

P*t = 1.098 Wt + 12.050 Ft - INFLATION

Q*t = - 0.308 Wt + 31.083 Ft - GROWTH

ANALYSIS

A MATHEMATICAL DEMONSTRATION

OF WHY NEOCLASSICAL

THEORY IS WRONG

THE IMPOSSIBLE NEOCLASSICAL SUPPLY CURVE

𝑷 + 𝒅𝑷𝒅𝑸 𝐱 𝑸= 𝒅𝑪𝒅𝑸

THE PROFIT MAXIMIZATION EQUATION

ASSUMPTIONS:

PRODUCTION CAPACITY IS “GIVEN”

dP/dQ = ZERO

THEREFORE P = dC/dQIS SAID TO BE A SUPPLY CURVE

HOWEVER...

THE IMPOSSIBLE NEOCLASSICAL SUPPLY CURVE

WHEN DEMAND SHIFTS TO THE RIGHT

AND THEN THE “SUPPLY CURVE” IS

SHIFTED TO THE RIGHT.

PROFITS RISE AND NEW INVESTMENT

EXPANDS PRODUCTION CAPACITY

THE MATTER OF COMPETITION

DEMAND PRICE ELASTICITY e 𝑒 = 𝑑𝐷 𝑑𝑃𝑥 𝑃𝐷

INDIVIDUAL FIRM

DEMAND PRICE ELASTICITY ei 𝑒𝑖 = 𝑑𝐷𝑑𝑃𝑥 𝑃𝐷 𝑥 𝐷𝐷𝑖 𝑒𝑖 = 𝑒 1𝑆𝐻𝐴𝑅𝐸

MONOPOLY PRICE MP versus ACTUAL PRICE P

20

30

40

50

60

70

70 72 74 76 78 80 82 84 86

P MP

BRAZILIAN CEMENT MARKET

OLIGOPOLY DEGREE Z versus PROFIT MARGIN MBRAZILIAN CEMENT MARKET

BRAZILIAN CEMENT MARKET

THE PHILIPS CURVE

DP(W)t = - 10.68 + 80.5/ I NV(W)t

(-10.0) (10.7)

R2 = 0.90 DW = 1.58 F (1,12) = 114.2

THE ENDOF THE NEOCLASSICAL

DOMINANCE?

TO BE CONTINUED.