Market #2 · Goods & Services

The goods & services market

A parallel to the labor module: the full structural specification of demand and supply, all sector-level demand equations, canonical estimation methods, and the elasticities used to price, tax, forecast, and regulate real-world markets.

Market clearing

Q^{D} (P; X^{D}) = Q^{S} (P; X^{S}) \Rightarrow P^{*}, Q^{*}

Equilibrium price P* and quantity Q* solve the system. Any change in a demand shifter X^D or a supply shifter X^Smoves the equilibrium; comparative statics use the elasticities $η$ and $ε$ to sign and size the response.

Demand elasticity η

-1.20

Supply elasticity ε

1.50

Shift demand (Δ X^D)

Shift supply (Δ X^S)

Equilibrium: P* ≈ 10.00, Q* ≈ 100.0. Positive shift-D = demand determinants push right (higher Y, lower P_s, etc.); shift-S = supply determinants push right (lower w, higher A).

Structural demand & supply

Q_{t}^{D} = f (P_{t}, P_{t}^{s}, P_{t}^{c}, Y_{t}, W_{t}, r_{t}, π_{t}^{e}, E Y_{t}, τ_{t}, N_{t}, D_{t}, θ_{t}, S_{t}, F X_{t}, C_{t}^{cr}, u_{t})

Q_{t}^{S} = g (P_{t}, w_{t}, P_{t}^{m}, r_{t}, A_{t}, K_{t}, τ_{t}^{p}, Reg_{t}, Sub_{t}, P_{t}^{e}, N_{t}^{f}, W_{t}^{x}, S C_{t}, μ_{t})

Signs, sources, and rationales are enumerated below (one row per regressor entering the logit / log-linear specification).

Demand determinants

16 determinants

Symbol	Name	Data source	Sign	Rationale
P	Own price of the good	CPI micro / scanner data (NielsenIQ, Circana)	−	Law of demand: substitution and income effects reduce quantity demanded as own price rises.
P_s	Price of substitutes	CPI / PPI cross-item	+	Higher substitute price shifts demand toward this good (cross-price elasticity > 0).
P_c	Price of complements	CPI / PPI cross-item	−	Complements are consumed jointly; higher P_c reduces bundle demand.
Y	Real disposable income	BEA NIPA Table 2.1; Eurostat	±	Normal goods +, inferior goods −. Sign identifies the good's income class.
W	Household net wealth	Fed Flow of Funds Z.1; ECB HFCS	+	Wealth effect on durables and discretionary services (Case–Quigley–Shiller).
r	Real interest rate	FRED DFII10; Bloomberg	−	Raises user cost of durables and housing services; discounts future utility.
π_e	Expected inflation	Michigan / SPF / SCE	+	Pulls forward purchases of storables (intertemporal substitution).
𝔼[Y]	Expected future income	Consumer confidence; SCE	+	PIH / LC-PIH: permanent income drives consumption more than transitory shocks.
τ	Indirect tax rate (VAT/GST/excise)	OECD Tax Database	−	Statutory incidence raises consumer price; elasticity determines split with producer.
N	Population / target segment size	Census; Eurostat demog.	+	Aggregate demand scales with the number of buyers.
D	Demographic composition (age, HH size)	ACS; LFS	±	Life-cycle spending shares differ (healthcare ↑ with age, education ↓).
θ	Preferences / tastes / brand equity	MMM; conjoint studies	±	Advertising, fashion, habit persistence shift the intercept and slope.
S	Seasonality / weather	NOAA; retail calendar	±	Cooling degree days, holidays: strong for utilities, apparel, tourism.
FX	Nominal exchange rate	BIS effective rates	±	Depreciation raises import prices, shifts demand to domestic substitutes.
C_r	Consumer credit availability	Fed SLOOS; ECB BLS	+	Looser credit standards expand auto and durables demand.
u	Unemployment rate (precautionary)	BLS CPS	−	Rising u raises precautionary saving, reduces discretionary spending.

Supply determinants

14 determinants

Symbol	Name	Data source	Sign	Rationale
P	Output price	PPI / CPI	+	Law of supply: profit-maximizing firms increase Q as MR rises.
w	Nominal wage / unit labor cost	BLS ECI; Eurostat LCI	−	Higher input cost shifts MC up, reduces supplied quantity at given P.
P_m	Materials & energy prices	PPI intermediate; EIA; ICIS	−	Input-cost pass-through; sharp for energy-intensive sectors.
r	Cost of capital	FRED BAA; WACC estimates	−	Raises rental price of capital; delays capacity expansion.
A	Total factor productivity	BLS MFP; Penn World Table	+	Solow residual: lowers MC, shifts supply right.
K	Installed capacity / capital stock	Fed G.17; OECD	+	Capacity utilization ceiling; expansion is lumpy and lagged.
τ_p	Corporate & payroll taxes, tariffs	OECD; USITC HTS	−	Reduces after-tax MR or raises effective input cost.
Reg	Regulatory burden (env., safety, licensing)	OECD PMR; RegData	−	Compliance costs act like a tax on output.
Sub	Producer subsidies / tax credits	OECD PSE; IRS credits	+	Effective negative tax on marginal cost.
P_e	Expected future output price	Futures; PPI forecasts	±	Storable goods: higher P_e shifts current supply left (inventory).
N_f	Number of firms in market	BDS; Orbis	+	Entry expands industry supply; exit contracts it.
Wx	Weather / harvest shock	NOAA; USDA WASDE	±	Agriculture, construction, tourism: exogenous supply shifter.
SC	Supply-chain / logistics friction	NY Fed GSCPI; Freightos FBX	−	Container rates, port congestion raise effective MC.
μ	Market power / markup (Lerner)	De Loecker–Eeckhout; CompuStat	±	Higher μ = P/MC widens the gap between MC curve and equilibrium P.