Institutions and Economic Theory

1
Institutions and Economic Theory

• II. The Law of Demand and the Theory of Refutable
  by facts

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The law of demand

• All other things being equal (or ceteris
  paribus), when the price of a goods rises, the
  amount of it demanded decreases.
• What is all other things?
• quality, price of other goods, income,
  information, and even the weather, anything
  except quantity and price of the goods considered.

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Disputes

• Some popular counterexamples
• MBA certificate
• The bizarre behavior in the stock market
• The Diamond
• Explanation
• That quantity change in the same direction with
  price is because the demand curve is changing, or
  other things is changing.
• How to find a real counterexamples?

4
Logical Deduction

• From the mathematical logic, the demand curve can
  be either upward, or downward.
• Normal goods and inferior goods
• the substitution effect is greater than the
  income effect.
• Giffen goods
• the income effect is greater than the
  substitution effect.

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Manipulation

• Hicks (1946)
• The share of the certain product expenditures in
  the total expenditures is very small, then the
  income effect can be neglected.
• Friedman (1949)Heiner (1974)
• In the general equilibrium, the income effect is
  zero

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Manipulation

• Stigler(1947)
• There are no facts for the Giffen goods
• Dougan (1982)
• If the demand curve is upward, then decrease of
  supply should lead to falling of the price. But
  the facts are inconsistent with this logic.
• ??? (2000,??,?200?)
• The Giffen goods cannot exist in the competitive
  market.

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The law as an axiom

• Why is this law so important in economics?
• On the law of demand is built almost the whole
  edifice of economics.
• The building blocks of the positive economics
• Individualism
• Rationality
• The law of demand

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Variables

• Price in the demand curve
• Price is the market price.
• If there are no prices for some certain goods,
  the implicit cost is used instead.
• Sometimes, the price may include the opportunity
  cost.
• Quantity in the demand curve
• For a given price, the quantity of demand is the
  quantity that a agent is willing to buy, not the
  quantity of transacting.

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Variables

• To mention quantity without the quality is
  meaningless
• The demand curve with single quality
• Gold, Silver, etc.
• Multi-qualities
• Diamond, Digital toys, etc

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Test the law of demand single-quality

• Test condition specified
• Research grants with limits
• and research grants without limits
• Research grants with limit
• The price per unit copying is lower, so the
  quantity of demand for copying is higher.
• The price of traveling per mile, or going to
  restaurant per time, is lower.

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Test the law of demand multi-qualities

• Sunkist orange
• Phenomena very few sold in California, most of
  oranges exported to other countries.
• Alchians explanation
• Suppose the relative price of high quality to
  low quality is 21
• Plus 1 of freight cost, in Hongkong, the relative
  price of the two is changed to 32.
• Although the nominal price of the sunkist orange
  is higher than in the U.S , the relative price of
  the sunkist is going down in Hongkong.

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Questions

• The mini-car like QQ brand is relatively fewer in
  Shanghai than in other provinces. Why?
• Is it possible that a man will spend 10,000 yuan
  in decorating his apartment which costs him one
  million yuan to buy?

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Quotas and tax on price

• Hongkongs cloth exports Quotas
• Quotas is tradable in the market. The price of
  quotas changes the relative price of high-quality
  clothing to low-quality clothing.
• American people saw more high quality cloth
  imports of Hongkong in the 80s-90s than before.
• The trade relationships between China and U.S,
  and China and EU.