B

B. Examples of Neoclassical Theory
C. Sample Problems
D. Criticisms of Neoclassical Theory
E. Summary

Alfred Marshall paraphrased:

"Demand & Supply are equally important, like blades of a scissors, they determine equilibrium price."

Supply and Demand for finished goods and services

First we'll examine the old supply and demand propositions - as an example of a neoclassical, static model.
-- It will have very predictable outcomes.
-- It never admits of ambiguity nor too much complexity.
-- And it will always give you the right answer!
Very scientific!

Demand for Labor (or factors of production)

Second, in a half-dozen sample problems we'll examine demand and supply for factors of production in Gerry's Weed-wackers Garden Service.
-- Today's topic is the neoclassical static model for demand for labor. The problems assume Gerry pays her gardeners a fixed wage rate.
-- Labor is never wanted for its own sake.
-- A Laborer is wanted for the dollar value of his/her marginal product (or VMP), so long as VMP exceeds that laborer's wage.

Demand and Supply Model

Here is the familiar demand and supply model as a representative of models, in its mathematical simplicity:

Step 1: Write one independent, linear equation for each unknown variable.

Step 2: Find a solution equation in which a single unknown variable (such as Price) is defined only in terms of the slopes and intercepts defining all the other variables.

Let capital letters represent the size or magnitudes of those things which vary in size,
such as variables for Price and Quantities demanded & supplied.

Let lowercase letters represent the slopes and intercepts (or parameters and constants) of linear demand and supply curves.

(Letters a and c are intercepts along the horizontal axis; letters b and e are the slopes of demand and supply curves respectively.)

So Step 1 requires that we write:

Equation 1 is D = a – b P is a linear demand curve.

Equation 2 is S = c + e P is a linear supply curve.

D is quantity demanded; S is quantity supplied; and P is price.

Step 2 requires that we recognize that forces underlying demand and supply produce an equilibrium price and an equilibrium quantity if Equations 1 and 2 are set equal to one another.

Here's how we do that:

Setting the right sides of equations 1 and 2 equal to each other says that:    a – bP = c + eP.
Collecting the intercepts on the left-side and adding bP to both sides says that:   a – c = bP + eP
Factoring P from the right-side leads to a – c = P(b + e)
Dividing both sides by (b + e) results in:

a – c = P                          This is how you find equilibrium price!
b + e

Note that a variable P has been defined soley in terms of slopes and intercepts, all known values.

That's it! Eureka!
a – c_ = P* This is called an equilibrium solution.
b + e

Said differently, equilibrium price (in this model) is always
“the difference in the intercepts divided by the sum of the slopes”.

It's typical of Neoclassical Economic Modelling

You always get the right answer when you know the intercepts “a” and “c,” and the slopes “b” and “e.” Your Excel spreadsheet can easily find equilibrium price within a marketplace, given appropriate meta-assumptions and data, and you can earn an “A” letter grade. Congratulations! You can do sophisticated economical mathematics using your home computer!

Neoclassical economics produces precisely calculated results.

Neoclassical econ makes (1) profs scientific, and (2) students happy!

Go on to:
C. Sample Problems