“We might as reasonably dispute,” Alfred Marshall wrote in his famous economics textbook first published in 1890, “whether it is the upper or the under blade of a pair of scissors that cuts a piece of paper, as whether value is governed by utility or cost of production.”
Prices are determined in the marketplace, through the communication between buyers and sellers, jointly through a negotiation reflecting their willingness to pay, and their costs of offering. Marshall offered us these tools, the demand curve and the supply curve, to understand price determination in perfectly competitive markets. And he also characterized them, and used them to illustrate price determination in a wide variety of examples.
As a part of this he introduced the notion of “elasticity,” a concept that Congresswoman Alexandria Ocasio-Cortez learned well in her economics courses, and used to drive home what she felt were some important lessons in understanding health care. Listen to her.
And so this week’s class in our course, Economics for Everyone, is about elasticity. If she can understand it, so can you. If she can use it, so can you. And that is what we do in the lecture: define the concept, and show how it is used to understand market outcomes for some policy relevant examples.
Download the presentation for Lecture 6, “Understanding and Using Demand and Supply Curves” as a pdf, and if you like listen to narrated version.
In his widely read guide to economics—The Undercover Economist—Tim Harford writes:
In a free market, people don’t buy things that are worth less to them than the asking price. And people don’t sell things that are worth more to them the asking price. … The reason is simple: nobody is forcing them to, which means that most transactions that happen in a free market improve efficiency, because they make both parties better off—or at least not worse off–and don’t harm anyone else.
The chapter of his book called “Perfect Markets and the ‘World of Truth'” is the starting point and the end point of the next block of lectures in our course Economics for Everyone. Harford is describing both the power of markets, and the potential for their failures, big and small. He is describing what economics call the two fundamental theorems of welfare economics, and in order to do so he has to explore the determination of relative prices, the neoclassical theory of value.
In perfectly competitive markets we can describe the determination of prices in terms of demand and supply curves. And so we have to develop a facility in using these tools to understand how markets work, how they are sometimes manipulated for better or for worse, and how they may fail in a way that can rationalize a role for public policy.
Download the presentation for the next couple of lectures, and keep reading!