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G. Ghukasyan, ph.d. of , associate professor
A. Martirosyan, ph.d. of , associate professor
Yerevan State University, Armenia
The article reveals new approaches in constructing demand and supply curves. The author believes that the presentation of the demand and supply curves in a three-dimensional level expresses the market situation more comprehensively.
Keywords: three-dimensional space of demand and supply spiral curves, Veblen effect, brands, substitution effect, decreasing returns to scale, market equilibrium.
In economics the concepts of demand and supply play an important role for the description and interpretation of a number of economic phenomena and processes. It is not accidental that the Nobel Prize winner P. Samuelson noted that in order to duplicate an economist one should periodically repeat the words “demand” and “supply”. Certainly the current graphical form of the demand and supply concepts is the product of many years discussions. Like in many other fields of social sciences, absolute truths were not adopted in this case too. In this regard there are Giffen paradox, Veblen effect, classical, Keynes comments and others. Moreover, if Keynesians give importance to the demand sphere from which the supply is derived, the classics highlights the supply which forms its own demand.
In fact, all these propositions are efficient for certain economic situations in the scope of certain conditions.Therefore, in order to be guided properly and to find effective solutions in different economic situations the comprehensive understanding of all these provisions is important.
In our opinion, the evolution of institutionalism is remarkable which perhaps was not given enough significance like marginal, Keynes and other “revolutions”. Let us turn to the evident formulations of demand and supply in the scope of the institutional economics.
Veblen effect refers to high-quality products, Giffen paradox to low-quality ones. In the case of the other products it is not so absolute, that the price reduction will endlessly bring to the increase of the consumed goods. In practice, the substitution effect is often appeared.
We think, that in the case of the economic development, growth and recession the reality could be described in the form of three-dimensional space of demand and supply spiral curves. That provides new approaches for the establishment of the market equilibrium.
Certainly, the price reduction will not cause an endless increase of the demand as it is depicted in the classical theory. For example, in some cases the increase of the product price due to publicity costs, can bring to the increase of the demand as far as the given product psychologically starts to be accepted in a different way: the idea of branding is effective. Although the Veblen effect cannot be endlessly displayed and starting from some point the increase of the product price will lead to a reduction in the volume of consumption. The institutionalists talked about this in detail. Then in our opinion the reduction of the product’s price in some cases can be perceived as the product’s “image” loss. The mentioned can refer to some brands. The graphical representation of all the possible observed variants perhaps can have the following appearance. The segments 1p -4p of the demand curve reflect the corresponding changes in the price and volume of consumption described above.
In our opinion the product supply curve can also be presented through such a chart. 1a segment of the chart is the “well-known” supply curve. Of course, according to the classical interpretation the increase of the product price leads to the increase of the volume of supply, although in our opinion in some cases however the substitution effect is possible to be observed and the demand will reduce starting from some point. The latter in its turn may lead to the reduction in the production volume in the case of price increases: “decreasing returns to scale” is exhibited. A tendency of the reduction in the price level is displayed starting from some point. This is due to enterprises leaving the given branch in terms of the reduction in demand. At the same time the product price reduction can cause a change in the attitude towards the product. This in turn, leads to the weakening of the position of a given manufacturer, cutting of production volumes in terms of reduction of demand. Of course, price reduction and decline in supply will finally bring to the increase in product demand which will be expressed with the substitution effect. In this segment “increasing returns to scale” is exhibited together with increased demand. Thanks to this it is possible to provide the product price decrease in the case of the production volume increase. Corresponding changes of the price and production volume are expressed by the segments 1a-4a of the supply curve.
At this level of discussions the possibilities of establishment of the market equilibrium are significant. A unique equilibrium is established in the result of the intersection of different sectors of the supply and demand curves.
Thus we believe that the presentation of the demand and supply curves in a three-dimensional level expresses the market situation more comprehensively. Suppose the third core can depict the expectations of economic agents, product quality and etc.
The change of the components of the stationary systems does not bring to the system destroy. It was accepted as a base for Heracles’, Cratilios’, Plato’s and for others’ doctrines when the features of the system to flow and change as a river was discussed. It is presented in the following statement: “You can never step into the same river twice”. Cratilios rewrote it in the following manner: “You can never step into the same river and get out of it”. Further, the tangle of the system’s discovery was discussed in such comments of the river system. It seems that it was a “challenge” towards the fetish of the rational presumption in the classic theory.
Unfortunately, in the case of the same size of the price and quantity market and economic equilibrium situations are often identified in economic analyses. In fact the situation is more complex than it is presented in the “ratchet effect or menu cost” models. Indeed, sometimes “it is difficult to step into the same river twice”, sometimes it is impossible. We tried to take into consideration the latter in creation the demand and supply curves from which different possibilities of establishment of market equilibrium can arise.
1. John Kenneth Galbraith, The New Industrial state, 1967, Moscow 2008
2. Fragments of the earlier Greek philosophers, Part 1, From the epic cosmogony to the atomic theory, A.V. Lebedev, Moscow, Nauka, 1989
John Kenneth Galbraith, The New Industrial state, 1967, Moscow 2008, p. 28 – 347.
Fragments of the earlier Greek philosophers, Part 1, From the epic cosmogony to the atomic theory, A.V. Lebedev, Moscow, Nauka, 1989, pg. 176-267, 540-552