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INTERVIEWS
WITH ECONOMISTS
BARRY
BURGAN
Barry Burgan
is a senior lecturer in the School of Commerce at the University
of Adelaide, where he teaches undergraduate and post-graduate
courses in corporate finance and quantitative research methods.
His research interests are in the areas of public finance issues,
regional economic development and regional modelling. He was previously
Director of the South Australian Centre for Economic Studies and
has been at the University of Adelaide for 12 years. Prior to
the University, he worked as a management consultant and in the
public sector. Barry has a continued involvement in economic policy
development matters. For example, he is currently chair of the
South Australian Community Housing Authority. He has also been
involved with the Ministerial Advisory Group on Local Government
Reform and evaluation of the EDS and South Australian Water outsourcing
bids, and has contributed to the Arthur D. Little report on directions
in the State economy and served on a number of public committees.
The supply
and demand model is widely used in economics. What do you think
are the strengths and weaknesses of this model?
The major
strengths of the model include:
- its intuitive
appeal – it seems sensible that as price goes up, producers
are willing to produce more and consumers are willing to consume
less. Thus, it is a model that makes sense.
- its general
usefulness across the whole range of products to explain behaviour
in export and import markets, in service and manufacturing and
primary industries, in monopolies and in perfectly competitive
markets.
The major
weaknesses include:
- the difficulties
in quantifying or identifying the shape and slope of the curves,
given that any given price and quantity outcome is dependent
on the joint positioning of the supply and demand curve
- the general
use of smooth curves, so that a small shift in price causes
a predictable shift in output. In practice, the model is challenged
by steps in the curves, particularly in supply curves, with
indivisibilities in the production process.
- distinguishing
between long- and short-term responses by the market.
Why do
you think the model is useful?
The major reasons it is useful include:
- while being
quite simple in an intuitive sense, it has extensive applications
in examining the behaviour of industries, and in policy framework
settings. The powerful concept of consumer and producer surplus
is derived so that the 'cost' of market imperfections can be
analysed.
- the influence
of demand and supply elasticities and the concepts of substitutes
and complements (and their influence on elasticities) can be
used at a broad level to suggest the extent of cost of market
efficiencies.
- the simple
two-dimensional model can be easily extended by the use of concepts
of cross-price and income elasticities (i.e. what determines
the position as well as the slope of the demand and supply curves),
thereby broadening the analytical framework. Indeed, a major
Australian economic model – MONASH and its predecessor
ORANI – has been used to analyse the impacts of policy
change such as reductions in tariff levels, impacts of microeconomic
reform and so on — and is primarily a model of interactions
of demand and supply curves for some 100 industry groups.
Can you
give examples of where you have applied this theory?
Demand and supply principles underlie virtually all analysis in
applied microeconomic issues. Some examples of where I have directly
applied the principles include:
- assessment
of the impacts of removing quota controls in the egg industry
in South Australia. Typically, agricultural products have been
heavily regulated and production controlled by quota and licence
systems. The quotas achieved their own values that reflected
the cost of the regulated
- cost-benefit
studies of major environmental and land planning activities
in South Australia, for example airport location and urban redevelopment
projects. Consumer welfare principles, involving demand and
supply of housing and recreational services, were used to identify
consumer willingness to pay.
- analysis
of the electricity market in South Australia, and the implications
of the national market for the broader economy
- assessment
of market responses to a tourist accommodation or bed tax –
how would it shift demand and supply positioning in the tourism
industry?
Economics,
by necessity, involves a lot of simplifying assumptions. Does
this limit the usefulness of the theories?
By definition
a model will involve simplifying assumptions that do not match
reality. Architect's models, for example, cannot be lived in.
Model cars will not drive you from Melbourne to Sydney. The demand
and supply model of market behaviour is not the market itself.
In general, though, experience would show that even with the simplifications
involved, well-developed applications of the demand and supply
model will adequately predict market behaviour. What it won't
predict is the path by which the economy will move to its new
position, or the resources used in shifting to that position.
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