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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. LAW OF SUPPLY AND DEMAND SUPPLY ADJUSTS TO DEMAND: THE ECONOMY IS DEMAND PULL. Maslow’s Hierarchy of Needs Self-actualization personal growth and fulfilment Esteem needs achievement, status, responsibility, reputation 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 THE DEMAND CURVE GIVEN THE INCOME, IF PRICE RISES THEN QUANTITY DEMANDED FALLS. P THEREFORE, THE DEMAND IS A RELATION CONNECTING PRICE AND QUANTITY WITH NEGATIVE SLOPE DEMAND Q WHAT CAN SHIFT THE DEMAND CURVE? P THE EXOGENOUS VARIABLES D1 D2 D WHAT CAN CHANGE DEMAND CURVE SLOPE? P RICH COUNTRY ELA STIC INPOOR ELACOUNTRY STIC Q Maslow’s Hierarchy of Needs Self-actualization personal growth and fulfilment Esteem needs achievement, status, responsibility, reputation 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. ELASTICITIES SUPPLY ADJUSTS TO DEMAND: 1. PROPOSING A PRICE (MARKETING). WHICH DEPENDS ON COSTS, DEMAND (INVENTORIES) AND COMPETITION. 2. DECIDING PRODUCTION. WHICH DEPENDS ON PROFITS, DEMAND (INVENTORIES) AND COMPETITION. SUPPLY ADJUSTS TO DEMAND: WHEN DEMAND RISES (INVENTORIES FALL) THEN PRICE RISES AND PRODUCTION GROWS. SO, P THE SUPPLY CURVE IS A POSITIVE SUPPLY RELATION BETWEEN PRICE AND PRODUCTION. THE SUPPLY CURVE IS A THEORETICAL CONSTRUCTION. Q WHAT CAN SHIFT THE SUPPLY CURVE? THE COST OF PRODUCTION. WHAT CAN CHANGE SUPPLY CURVE SLOPE? P CAPITAL, MENOS LESS CAPITAL INELASTIC PERECÍVEL MAIS PERISHABLES MAIS CAPITAL, MORE CAPITAL ELASTIC MENOS PERECÍVEL NON-PERISHABLES Y WHAT CAN CHANGE SUPPLY CURVE SLOPE? P MENOSCAPITAL CAPITAL, LESS AGRICULTURE MAIS PERECÍVEL PERISHABLES MAIS CAPITAL, MORE CAPITAL NONMENOS PERECÍVEL INDUSTRY PERISHABLES Y WHAT CAN CHANGE SUPPLY CURVE SLOPE? P MENOSCAPITAL CAPITAL, LESS POOR COUNTRY MAIS PERECÍVEL PERISHABLES MAIS CAPITAL, MORE CAPITAL MENOS PERECÍVEL RICH NONCOUNTRY PERISHABLES Y 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 P P0 PMIN Q0 Q ECONOMETRICS CASE STUDY: THE BRAZILIAN CEMENT MARKET 2SLS DISTRIBUTED LAGS METHOD FIRST STAGE GENERAL EQUATION OF THE REDUCED MODEL Yit = Ai0 + Ai1(L)Wt + Ai2(L)Ft + it 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) R2 = 0.98 (13.07) DW = 1.90 (-3.76) F (3,12) = 162.48 PRICE: Pt = 16.791 + 1.102 Wt-2 + 11.967 Ft-1 (6.33) (6.04) R2 = 0.87 (2.32) DW = 2.24 F (2,12) = 40.64 PRODUCTION: Qt = 9.362 - 0.304 Wt + 31.048 Ft-1 - 2.960 D1 (4.69) R2 = 0.98 (-2.72) (12.87) DW = 1.94 (-3.60) 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 2SLS METHOD – SECOND STAGE THE BRAZILIAN CEMENT MARKET 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 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 BRAZILIAN CEMENT MARKET ANALYSIS 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 EXAMPLE: SOURCES OF VARIATIONS P*t = 1.098 Wt + 12.050 Ft - INFLATION Q*t = - 0.308 Wt + 31.083 Ft - GROWTH A MATHEMATICAL DEMONSTRATION OF WHY NEOCLASSICAL THEORY IS WRONG THE IMPOSSIBLE NEOCLASSICAL SUPPLY CURVE THE PROFIT MAXIMIZATION EQUATION 𝒅𝑷 𝒅𝑪 𝑷 + 𝐱𝑸= 𝒅𝑸 𝒅𝑸 ASSUMPTIONS: PRODUCTION CAPACITY IS “GIVEN” dP/dQ = ZERO THEREFORE P = dC/dQ IS SAID TO BE A SUPPLY CURVE HOWEVER... THE IMPOSSIBLE NEOCLASSICAL SUPPLY CURVE WHEN DEMAND SHIFTS TO THE RIGHT PROFITS RISE AND NEW INVESTMENT EXPANDS PRODUCTION CAPACITY AND THEN THE “SUPPLY CURVE” IS SHIFTED TO THE RIGHT. THE MATTER OF COMPETITION DEMAND PRICE ELASTICITY e 𝑑𝐷 𝑃 𝑒 = 𝑥 𝑑𝑃 𝐷 INDIVIDUAL FIRM DEMAND PRICE ELASTICITY ei 𝑑𝐷 𝑃 𝐷 𝑒 = 𝑥 𝑥 𝑖 𝑑𝑃 𝐷 𝐷 𝑖 1 𝑒 = 𝑒 𝑆𝐻𝐴𝑅𝐸 𝑖 BRAZILIAN CEMENT MARKET MONOPOLY PRICE MP versus ACTUAL PRICE P 70 60 50 40 30 P 20 70 72 74 76 78 MP 80 82 84 86 BRAZILIAN CEMENT MARKET OLIGOPOLY DEGREE Z versus PROFIT MARGIN M BRAZILIAN CEMENT MARKET DP(W)t = - 10.68 + 80.5/INV(W)t (-10.0) (10.7) THE PHILIPS CURVE R2 = 0.90 DW = 1.58 F (1,12) = 114.2 THE END OF THE NEOCLASSICAL DOMINANCE? TO BE CONTINUED.