the theory of supply and demand

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1、ThetheoryofsupplyanddemandTheconceptsofsupplyanddemandarecentraltothestudyofeconomics.Thebodyoftheoryissubstantial�standardundergraduatetextbookssuchasLipsey�sAnIntroductiontoPositiveEconomicsdealwiththesubjectoverseveralhundredpages.Paper4requiresthecandidatetohaveanelementaryu

2、nderstandingofsupplyanddemandtheory.Itisimportanttounderstandbasicconceptsandthenapplythemtoreal-lifesituations.Indoingso,someofthe�nutsandbolts�ofthetheoriesmayquiteproperlybeoverlooked.Forexample,thecandidatemayhavetodemonstrateanabilitytoanalyseasituationusingsupplyanddemandc

3、urveswithouteverknowing-orneedingtoknow-howthecurvesareactuallyderivedfromfirstprinciples.BackgroundSomeregardAdamSmithasthefoundingfatherofeconomics.Hisfamousbook�TheWealthofNations�(1776)toucheduponhisperceptionsofmarketsandhowtheyoperate.Writingofthepricesystem,whichisbuilton

4、thetheoriesofsupplyanddemand,Smithstatedthatitwasthe�invisiblehandwhichguidestheactionsofconsumersandproducers�.Overacenturylater,AlfredMarshallproposedamorecomplextheory,focusingonmicro-economicanalysis.ItwasMarshallwhofirstformallyidentifiedthedeterminantsofsupplyanddemandandt

5、hendevelopedhisconceptsindiagrammaticform.Thesupplyanddemandcurvesusedinmicro-economicstodaydependdirectlyonMarshall�swork.Intheinter-waryears,JohnMaynardKeynesdrewinspirationfromtheworkofMarshallinformulatinghis�GeneralTheoryofEmployment,InterestandMoney�.Histheoryofeffectivede

6、mand(nowmorecommonlyreferredtoasaggregatedemand)isadirectextensionofmicro-economicanalysistomacro-economictheory.SupplySupplyistheflowofgoodsandservicesbroughttothemarketplacebyproducersinagiventimeperiod.Generally,thehigherthepricewhichcanbeobtained,thehigherthequantitysupplied

7、.Economistsrepresentthesupplycurvebymeasuringpriceontheverticalaxisandquantitysuppliedonthehorizontalaxis,withthecurveslopingupwardsfromlefttoright(Figure1).DeterminantsofsupplyThesupplytoamarketwillnotbeconstant.Theflowisinfluencedbyseveralfactors,allofwhichmaychangeovertime.Pr

8、ice:Asmentionedabove,ahigherpricewillpromptprod