Markets for Managers: A Managerial Economics Primer

CHAPTER 4 Prices and Economic Calculation

‘The rain starts coming down harder. You wonder if you own an umbrella. You’ve left so many in taxis. Usually, by the time the first raindrop hits the street, there are men on every corner selling umbrellas. Where do they come from, you have often wondered, and where do they go when it's not raining? You imagine these umbrella peddlers huddled around powerful radios waiting for the very latest from the National Weather Service, or maybe sleeping in dingy hotel rooms with their arms hanging out the windows, ready to wake at the first touch of precipitation. Maybe they have a deal with the taxi companies, you think, to pick up all the left-behind umbrellas for next to nothing. The city's economy is made up of strange, subterranean circuits that are as mysterious to you as the grids of wire and pipe under the streets.'

—Jay McInerney¹

You may have skim read the opening quote to this chapter, but I implore you to slow down and read it again. The purpose of this chapter is to illuminate those circuits that ensure that umbrella sellers appear when the rain starts to fall. When we use comparative statics we see how a change in economic conditions will cause a movement from one equilibrium to another. However the really interesting question is not whether we get from point A to point B, but how?

Comparative statics also imply that demand and supply curves exist independent of the institutions of market exchange. Indeed in many economics courses ...