Birks – Mankiw Chapter 4: The Market Forces of Supply and Demand
Mankiw, N. G. (2015) Principles of macroeconomics (7th ed.)
Principles of microeconomics (7th ed.)
Principles of economics (7th ed.)
Mason, OH: South-Western Cengage Learning.
Chapter 4 – The Market Forces of Supply and Demand
When reading the chapter, here are some aspects to consider:
- You will see similarities between the description of market demand curves and market supply curves. For both, there are several determinants, one of them being price and generating movements along the curve. The other determinants cause shifts on demand/supply. The pattern of analysis involves holding all but one determinant constant and seeing what happens as that variable (in this case price) changes. This is a way to systematically consider the impact of each variable. If two or more determinants change at the same time, it is not possible to separate out their effects. We know that, in the real world, many things change simultaneously. There is an assumption that we can consider individual effects in isolation, then we can then combine them to consider more complex situations.
- There is a focus on price in the diagrams, and this may shape our perceptions, but the other determinants are also important. In the real world competition is not just price competition between producers of identical items.
- Think about what we might actually observe in a market – we do not see complete demand and supply curves. Instead, we might observe certain points. Individual suppliers might know their own sales, but not those of their competitors. Even if we know price and sales in a market, this may not give us equilibrium points. One suggestion is that we would just see the “short” side of the market (the supply curve up to equilibrium price and the demand curve for prices higher than equilibrium).
- One approach to equilibrium, rather than just “forces in balance”, or “a system at rest”, is “people’s plans are realised”. This recognises that economic decisions are made by individuals, and are based on certain expectations (such as the quantity they can buy or sell at a given price). If their plans are realised, their expectations are correct. If they are not realised, they are likely to revise their expectations and change their behaviour, so the outcome will change. If a system is at equilibrium, there is no incentive for change unless some determinant changes.
- There is more to be considered when thinking of real world markets, such as the information available and how it is conveyed, the ways in which adjustments can occur, the importance of distance and location in setting the geographical boundaries of markets, etc.. Also bear in mind the importance of property rights, trust, contracts, etc., in other words, institutional aspects.
- For a more detailed critical discussion of the supply and demand approach, see Birks, S. (2014). Supply and demand models – the impact of framing. Real World Economic Review, (67), 67-77.
Commentary by Stuart Birks, 28 August 2014