Demand and Economic Evolution

The concepts of demand, supply, and equilibrium are intended to help us understand the evolution of prices and outputs in competitive markets. They can be applied to the understanding of past, and current events. While future events are always uncertain, they can also be used to forecast what is likely to happen in the future. But we will need more detail in order to put these concepts to work. in history, for example, we can find developments that seem at first to pose problems for the supply and demand theory. But, as we shall see, a careful look at the details will solve the problems.

Here are four developments in economic history that raise questions about demand:

1. Agricultural prices have fallen fairly steadily since 1910. During that time, agricultural employment and incomes have declined steadily.

2. Computer prices have fallen steadily at least since 1960. During that time, the computer industry has expanded and become more and more important.

3. The LP record industry cut prices in an experiment, and profits increased, leading to industry growth.

4. Public transportation services have to increase their prices to reduce their deficit by increasing fare revenues.

How can we sort these seeming contradictions out? We will explore the answer in the pages to come. We will see that a key to understanding many market developments is the elasticity of demand. This chapter will define and explain this and related concepts.