Empirical Project 7 Supply and demand

Learning objectives

In this project you will:

Key concepts

  • Concepts needed for this project: the natural log transformation, dummy variable, confidence interval, and statistical significance.
  • Concepts introduced in this project: simultaneity.

Introduction

CORE projects

This empirical project is related to material in:

You may be familiar with supply and demand diagrams similar to the one shown in Figure 7.1. To find out more about demand and supply curves, read Sections 7.2, 7.7 and 7.8 in Economy, Society, and Public Policy. But how do we know what the supply and demand curves look like in the real world? Unlike the models in economics textbooks, we cannot ask consumers for their willingness to pay at different prices or ask firms to tell us their profit-maximizing decisions. Instead, usually the best data available are prices and quantities over a number of periods (both of the product we are interested in and of other products), and information about policies and other events that happened in those periods.

Example of supply and demand diagram: Equilibrium in the market for bread.

Figure 7.1 Example of supply and demand diagram: Equilibrium in the market for bread.

We will be looking at the US market for watermelons in 1930–1951 described in the paper ‘Suits’ Watermelon Model’ as an example of how to model demand and supply using available data and interpret the results.

Working in Excel

Working in R