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Welcome to the Q&A for ECN/APEC 2010, where you can ask questions and receive answers from your fellow students, the TA, and your professor.

Please only ask questions about the material for the course. Try to create discussions about the material we see in class, instead of just thinking of economics in general (this is an introduction to microeconomics class, not a policy or government class).

For questions and discussions about course organization or other course related topics, come see us after class or during office hours.

Feel free to discuss quiz questions on the Q&A, but do not provide direct answers to quiz questions before the quiz's due date.

If supply/demand alone isn’t enough to know the prices and quantities, what is needed to determine prices/quantities?

+2 votes
14 views
Supply and Demand help us understand where we are going and when we should stop, or in other words make predictions, but what else do we need to determine how much of a good to produce?
asked Feb 15 by canvas-ce92ae7bf2cbe (530 points)

1 Answer

+1 vote

In short, you need the economists' assumption that trade occurs at the equilibrium.

If you know the supply and the demand, and if you are willing to assume that trade occurs at the equilibrium (at least eventually, after buyers and sellers have adapted to changes in the market), then you have a sharp prediction: the price and quantity will be the equilibrium price and quantity.

We have seen in class that this does not always need to be true. We have talked about a number of examples where:

  1. trade does not happen at the equilibrium, and
  2. trade that starts outside of the equilibrium does not converge to the equilibrium.

Yet, we have also discussed why the equilibrium remains economists' best guess given a certain supply and a certain demand.

If the equilibrium assumption is deemed unsatisfactory, then we have to replace it by something else. Many economists have tried, and keep trying. But finding an alternative hypothesis that does better than the equilibrium hypothesis turns out to be a difficult task (some economists even think that the equilibrium hypothesis is the best hypothesis there is, and that it is pointless to try to improve upon it).

answered Feb 15 by Martin (875 points)
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