**Empirical Project 7** Supply and demand

## Learning objectives

In this project you will:

- convert from the natural logarithm of a number to the number itself (Part 7.1)
- draw graphs based on equations (Part 7.1)
- give an economic interpretation of coefficients in supply and demand equations (Part 7.2)
- distinguish between exogenous and endogenous shocks (Part 7.2)
- explain how we can use exogenous supply/demand shocks to identify the demand/supply curve (Part 7.2).

## Key concepts

Concepts needed for this project: the natural log transformation and confidence interval.Concepts introduced in this project: dummy variable and 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 7.3, 7.9 and 7.10 in *Economy, Society, and Public Policy*. But how do we know what the supply and demand curves look like in the real world? Textbook models of supply and demand are based on firms’ profit-maximizing decisions and consumers’ willingness to pay, but it is rarely possible to find data on these. 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.

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.