The Power of Supply and Demand

The Power of Supply and Demand: Thinking Tools and Case Studies for Students and Professionals

Lawrence W.C. Lai
Ben T. Yu
Copyright Date: 2003
Pages: 352
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  • Book Info
    The Power of Supply and Demand
    Book Description:

    In contrast to many economics texts, which are often abstract and mathematical, this book uses simple language and graphs to demonstrate the general applicability of basic economic concepts, informed by ideas of the transaction cost paradigm, to a wide range of social, physical and legal phenomena. The case studies and applications collected here should enable students and practitioners, especially those in the management of the built and natural environment, to appreciate the power of economic theory in expressing, interpreting, and reviewing policies and practices.

    eISBN: 978-988-8052-93-6
    Subjects: Economics

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-x)
  3. Foreword
    (pp. xi-xii)
    Adam Gifford

    Economics is often known to the lay public as the discipline of ‘supply and demand analysis’. In many ways, this is an over simplification, but it is also not far from the truth. Everyday and everywhere, whether one is examining the problems of Wall Street in New York, wild birds in the rain forests of the Amazon, oil fields in the North Seas, or the real estate market in Hong Kong, real world situations can be illustrated and analyzed effectively by the use of the simple tools of supply and demand.

    This book on the use of those basic tools...

  4. Preface
    (pp. xiii-xv)
    Lawrence W.C. Lai and Ben T. Yu
  5. Acknowledgements
    (pp. xvi-xvi)
  6. Part I: Building Blocks
    • 1 The Reasons for and Concept of Economics
      (pp. 3-22)

      We shall begin this book by discussing the social status of economics, the motivations for learning economics, some misconceptions about economic inquiry, the scientific nature of economics, and the relevance of constraints to economic analysis.

      Economics is a worldly philosophy, a philosophy for the City of Man. This worldly philosophy, once described as a dismal science by Thomas Malthus, is now regarded as the ‘Queen of the Social Sciences’. It is the only social-science discipline that attracts a Nobel Prize, the ‘Prize in Economic Science in Memory of Alfred Nobel’. A social science is an empiricist discipline that attempts to...

    • 2 Economics as an Inquiry of Selfish Behaviour Under Constraints
      (pp. 23-34)

      As a systematic way of thinking and interpreting the world, economics often betrays the common consciousness. Economics is optimistic about human rationality, accepting that human beings are selfish. Economics is democratic, asserting that all men are equal for being rational. This is true whether the subject of analysis is an international corporate mogul, or an aborigin in a jungle.

      A salient feature of economics as an intellectual discipline is that it presumes or acknowledges that human beings are born selfish. This perspective, which is not inconsistent with the fallen view of human beings in most world religions, compares strikingly with...

    • 3 The Property Rights Constraint
      (pp. 35-50)

      An important category of constraints or restrictions on human behaviour is the institution of property rights. Property rights as an institution are rules of competition. More precisely, they are the rules or criteria of success, which decide who gets what, when and how much out of the competition. Property rights are all embracing and discussion of them can be conducted at the social level, on which the whole economic, political, legal, and ethical systems are relevant, and at the organizational level, on which forms of contracting are particularly essential.

      Many textbooks begin by presenting economics as a subject that deals...

  7. Part II: Supply and Demand
    • 4 Supply and Demand
      (pp. 53-78)

      In this chapter, we shall discuss the basic laws governing the voluntary interaction of economic units within the institutional framework of a market, as implicit constraints on behaviour. The internal nature of these economic units, where they are non-human bodies, is deferred to the chapter on the firm (Chapter 10). We shall also discuss why some theorists believe that voluntary interaction in the market should be regulated by the state authority.

      The terms ‘demand’, ‘needs’, ‘value’, ‘price’, ‘market price’ and ‘costs’ in economics are distinct concepts. However, in ordinary social or even policy discussion, many people use these terms confusingly....

    • 5 Behind Demand
      (pp. 79-96)

      What gives a property, a good or product, its value? Its value lies in the use you can derive from it. But what about an oasis in a desert, what gives this real estate a value? People sometimes say, ‘It’s the resale value; it’s what others will be willing to pay for it in the future, i.e., it’s future value.’ But the answer prompts the question: what constitutes its future value? Eventually, we will come to realise that the gist of the matter is utility (preference, value, or taste). Preference, value, or taste is very subjective, but among the factors...

    • 6 Behind Supply
      (pp. 97-112)

      Behind supply is production. However, the concern of a supplier, usually a firm, is to obtain the maximum amount of profits rather than attaining the most efficient production per se. To determine the maximum profits, a firm needs to take into account both revenue and cost considerations in a marginal manner.

      Behind the concept of supply is ultimately one of production. A supply curve of a producer is the concept of production function which, as originally conceived, is a summary statement about technology. The concept of production function allows the formation of a unified framework that can be used for...

    • 7 Capital Theory
      (pp. 113-130)

      People sometimes view economics as the theory of supply and demand. To some extent, that is correct. However, there are intricacies to the interactions between supply and demand, behind demand, and behind supply, as we discussed in Chapters 5 and 6, that go beyond the simple intersection of two lines in a graph. The topic of capital theory is another basic concept in economics that can be superimposed on the operation of supply and demand. Economist Armen Alchian once put it emphatically: ‘If you don’t understand capital theory, you don’t really know economics.’ Capital theory is about the pricing and...

    • 8 Application of Supply and Demand Concepts I: Property Valuation and Property Prices
      (pp. 131-160)

      The four applications discussed in this chapter fall within the arena of ‘real estate economics’, ‘housing economics’ and ‘urban economics’ that are subjects taught in planning, surveying and real estate schools. Using standard supply and demand concepts as analytical tools, the applications this chapter should be of policy interest for housing experts and of professional interest to the surveyor, planner, and housing theorist.

      Our discussion of supply and demand concepts in Chapter 4 starts off with the implicit assumption that information about the market price is perfect or costless. We then relax this assumption in connection with auctioning and bargaining....

    • 9 Application of Supply and Demand Concepts II: Price Control
      (pp. 161-172)

      There are many ways by which the free operation of supply and demand are or can be constrained. In one form or another, some of these constraints are self-imposed by market participants. Examples of these are professional standards, price fixing or fee guidelines, restrictions on hours of operation, and limitations on advertising, etc. Others are imposed upon the market externally, usually by the government. Examples are zoning, taxicab licensing, health inspections, a minimum wage, and various agricultural subsidies on farm products.

      Among all the government-imposed constraints on the operation of market, a popular topic for discussion has been price control...

  8. Part III: Beyond Supply and Demand
    • 10 Market or Hierarchy: The Theory of the Firm
      (pp. 175-220)

      The discussion in previous chapters about the profit-maximization function assumes the existence of the firm. The profit maximization of a firm differs from the utility maximization of an individual in that the firm has no subjective preference while the utility maximization of an individual depends on the shape of the indifference curves of the individual. In other words, in neo-classical economic analysis, there are two types of decision-making unit in an economic system: individuals and organizations. It is generally believed that individuals consume goods and services provided by various organizations, which in turn use the individuals as inputs in the...

    • 11 Externalities, Public Goods, Monopolies and the Coase Theorem
      (pp. 221-260)

      The above quotation from Pope John Paul II is about the inherently amoral logic of the market, which is touched upon in connection with arguments against free trade in a previous chapter (Chapter 4). Its position differs significantly from the economist’s own reasons for saying that a free market based on voluntary contracts is ‘imperfect’. These reasons, as used by the welfare economists to argue that the government should intervene to correct such imperfections or ‘market failure’, are based on grounds of ‘in-efficiency’ rather than immorality. These reasons are (a) externalities, (b) public goods, and (c) monopolies. They involve a...

    • 12 Changing the Constraints Behind Supply and Demand: The Economic Analysis of Law
      (pp. 261-310)

      Economists are interested in several important dimensions of law. The first dimension is the assumption of human nature in jurisprudence. We mention in the chapter on the nature of economic inquiry (Chapter 2) the Chinese Legalist of the Warring States Period (BC 770–221) who believed that man is born sinful and needs to be governed by harsh laws, or subject to the ‘rule by law’. This pre-Hobbesian view has an apparent modern successor in the ideas of jurist Oliver Wendell Holmes, encapsulated in the so-called ‘bad man thesis’. If the ideas of the Chinese Legalist and Holmes about human...

  9. Index
    (pp. 311-335)