History of Demand and Supply Curves - Coursework Example

History of Demand and Supply Curves History of the Demand and Supply curves. Who discovered them and how were they discovered? Introduction Classical economics illustrate supply and demand as factors that determine prices of a commodity. This is achieved by correlating the amount a producer of a commodity hopes to sell at a certain given price, and the amount purchased of that commodity by the consumers. Supply therefore is the amount of a good that a producer will supply at a given time; generally, the higher the price, the greater the supply. Demand refers to the amount of a good that a consumer needs at a given price. The law of demand illustrates that, demand decreases as the price rises. Perfectly competitive economy illustrates that, combination of upward sloping supply curve and the downward-sloping demand curve brings about demand and supply curve, whereby the juncture of the two curves is the equilibrium price. Theories of demand and supply curves were attributed to Alfred Marshall in the early 2oth century. There are two types of economic reasoning that historically motivated supply and demand curves that is currently familiar in industries. The first involves a representation of a two dimensional space of output and price, which is a more inclusive kind of relationship involving other prices and quantities. The conception for this is where movement along the supply curve leads to a change in many economic variables. This can be a change in input prices and any other product prices. The second reasoning assumes all prices to be relentless except that specific product price and then output is determined as a function of that price. The output determined in this case is of the individual price taken by the firm and that of the industry. The adoption and the development of the first approach were by Marshall and by a series of commentators in the Marshallian tradition like Barone, Ricci and Robinson. The second approach resulted due to radical criticism of the first and its development was during the 1930s by scholars such as Robbins, Hicks and Allen. This was later refined by Samuelson. Alfred Marshall is known as the dominant scholar in British economics from around the prioddated 1890 till his death in the year1924. He specialized on microeconomics. His emphasize was that price and output of a given good is determined by both supply and demand. Marshall developed his illustrative breakdown of supply and demand even before his first edition book called Principles, where he dealt in detail the concept of determination of prices and output of goods (Creedy, 1998). His manuscript, The Pure Theory of Domestic Values (PTDV), written during the period of 1870s has a detailed exposition of the major theoretical arguments intended for development, with other many factual illustrations in his Principles book. According to Marshall, an industry which supplies to the market a given regular flow of output is said to operate on a point of long period supply curve when it satisfies the following three related conditions; first is that the factors of production are made accessible to the industry insuring that it is in the required quantity and quality, and secondly is that their organization should be the cheapest allowed by technical knowledge. The third condition is that the price the regular flow can be sold is just enough to encourage entrepreneurs to capitalize their material capital, and the workers of all grades ability to invest their personal capital in the trade. In the first condition, the implication is that, as the expansion of an industry occurs, there is an additional requirement in inputs, either newly produced or drawn from other industries. This condition, which in Marshall’s illustration is repeated, normally involves a given variation in a series of input prices and other product prices. In reference to inputs producible ad libitum, termed as once desire, he emphasized the likelihood that their prices may fall (Jacobs, 2010). With regard to raw materials and inputs in static supply, the possibility of price rise was stressed. The price interrelatedness, in regard to either the use of produced means of production or by the utilization of common factors by different industries was an attraction to Marshall from the very beginning. He analyzed this in length in his book, “the Principles.” His remark was that, these inter-relations can and must be overlooked in fast and common discussions of the world business affairs. This result to emphasize on coeteris paribus assumption, which is a basis of Marshall’s partial equilibrium analysis of supply as being indeed flexible. An element of judgment is experienced in the choice of variations available for consideration as a direct concern of a change in a particular industry’s output, and those to be entrenched in coeteris paribus. The contemporary origin of partial equilibrium is more accurate but narrower, hence betraying Marshall by oversimplifying his argument (Bhaskara, 1998) In the second condition, Marshall illustrated the concept of cost minimization by the individual firm. These were subject to given conditions of the industry, whereby, as the industry expands or contracts, the firms’ minimum costs are changed in relation to external economies. The logic of the supply curve led Marshall , more so in the ‘The Pure Theory of Domestic Values’ (PTDV), to underestimate the internal economies, laying main emphasis on the external ones. Marshall’s tastes for economic facts led him to consider industries as a combination of different firms, therefore leading to the need for abstract representation. The third condition stated defined Marshall’s long-period supply curve involving the absence of pure profits. Marshall’s value in use to the sale of the MMS, his ‘remunerative price’ of the PTDV, and his normal supply price of the Principles equals to production expense per unit, and allowance being made for ordinary profits. In the PTDV, in his first edition of his book ‘the principles,” the argument is carried out in terms of a given average cost per unit. Therefore, all these conditions fulfilled, Marshall’s analysis concentrates on the direction of change of the supply price as the industries output is consequently changed. The solitary law to which the supply curve has to adhere to in all cases is that it cannot bend backwards. This is because there cannot be more than one remunerative price for the same amount. Marshall deliberates long-period curves of all probable slopes as potential description of market circumstances. The supply and demand curve of a given industry was thus simply designed to show the possible set of market circumstances of supply. There are many different factors working together, therefore, as demand for a commodity rises permanently, and aggregate production increases, this results in an increase in price of law materials being supplied to the industry (Jacob, 1946) According to Pantaleoni, Marshall’s specific contribution of supply and demand curves consisted precisely of the relationship between industries’ output and long period price. The understanding of the long period price at a given production level was similar to that of Ricardo’s. In interpretation by Pantaleoni’s, he stated, ‘Under condition of perfection free competition, there an exchange of goods susceptible for reproduction in accordance with the ratio of the costs. This necessitates our consideration on the cost of production in terms of index of the available amount of every given commodity (Jacobs, 2010). The other concept of Marshall’s contribution relates to consumer surplus. He noted that for each unit of a commodity, price remains constant, whereas the value of the consumer of each unit added decreases. A consumer is known to buy up to the point where the marginal value equals to the price. Thus, on any other units previous to the last, there is a consumer benefit in which he pays less than the original value of the good. The scope of the benefit is established by the variance between the consumer’s value of all the units and the total amount paid for the units. This difference is what is regarded as the consumer surplus. Marshall on the other hand also introduced the concept of producer surplus. This is the amount the producer is paid for minus the amount he is willing to pay for. These concepts were used by Marshall to measure the changes in wellbeing from the policies of the government such as taxation (Creedy, 1998). The need for Marshall to understand how markets adjust to changes in supply and demand led to the introduction of the idea of three periods. The first being the market period, is the amount of time in which the stock of a commodity is fixed. Secondly, is the short period, which refers to the time in which supply of a commodity can be increased by addition of labor and other inputs but doesn’t involve capital addition. Thirdly is the consideration of the amount of time taken for the capital to be increased. In order to achieve a state of being dynamic in economics rather than being static, Marshall applied the use of classical mechanics tools. This includes the concept of optimization. With the use of these tools, Marshall, like other neoclassical economists, took market institutions and peoples’ preference and technology as given. Marshall’s argument is that, the economy is an evolutionary process whereby market institutions, technology, and people’s preferences evolve along the people’s behavior. Demand and Supply curves are illustrated as; P P1 Q1 Q2 Q Retrieved from https://www.google.com/search?q=Marshallian+demand+curve&client=firefox-a&hs=Gqj&rls=org.mozilla:en-US:official&channel=sb&tbm=isch&tbo=u&source=univ&sa=X&ei=jPxiU83aKo7g7QaY3ICgDA&ved=0CD8QsAQ&biw=1143&bih=740&dpr=0.9#facrc=_&imgdii=_&imgrc=B5Rv8VyRFHEhhM%253A%3BiO7Y-0DWmrOLcM%3Bhttp%253A%252F%252Fccs.mit.edu%252Fpapers%252FCCSWP161%252FImage6.gif%3Bhttp%253A%252F%252Fccs.mit.edu%252Fpapers%252FCCSWP161%252FCCSWP161.html%3B296%3B216 on 2nd May, 2014. This illustrates Marshallian’s demand curve, showing a “A” movement along the demand curve that occurs in response to a change in price s s Retrieved from https://www.google.com/search?q=Marshallian+demand+curve&client=firefox-a&hs=Gqj&rls=org.mozilla:en-US:official&channel=sb&tbm=isch&tbo=u&source=univ&sa=X&ei=jPxiU83aKo7g7QaY3ICgDA&ved=0CD8QsAQ&biw=1143&bih=740&dpr=0.9#facrc=_&imgdii=_&imgrc=B5Rv8VyRFHEhhM%253A%3BiO7Y-0DWmrOLcM%3Bhttp%253A%252F%252Fccs.mit.edu%252Fpapers%252FCCSWP161%252FImage6.gif%3Bhttp%253A%252F%252Fccs.mit.edu%252Fpapers%252FCCSWP161%252FCCSWP161.html%3B296%3B216 on 2nd May, 2014. From the above illustration, a movement along the supply curve occurs in response to a change in price. In consideration of externalities, taxes and subsidies, Marshall argued that it is only in the case of constant costs, can competition result in optimal distribution of resources. External diseconomies brought the implication that the growth of industries was very large as the new ones did not take into consideration to the cost that they imposed on others already in the market. On the other hand, external economies brought the implication that industries growth not growing large enough as the new potential entrants did not take into account the beneficial effects they result to on other firms. Marshall’s argument in this case is based on the consumers’ surplus measures of welfare (Farmer, 2007). Conclusion The major reason for shifts in economy is the aggregate demand. This can be affected by consumers, either locally or foreign, the federal, and the government. Generally, expansionary policy tends to shift the aggregate demand curve to the right while in the case of contractionary policy, it does shift it to the left. While having the case of a long run, despite the fact that long term aggregate supply is fixed by factors of production, short-term aggregate supply does shift to the left and therefore the only effect of change in aggregate demand is the change in price level. References Bhaskara, R. (1998). Aggregate Demand and Supply Models. New York: St. Martins Press. Creedy, J. (1998). The history of economic analysis. UK: Edward Edgar. Farmer, E. (2007). Agregate Demand and Supply. Cambridge: Press. Jacob, V. &. (1946). Cost Curves and Supply curves. Berlin: Print. Jacobs, C. &. (2010). Operation and Supply chain management. New Work: Press. Read More