The importance of understanding demand and supply
in economics could be compared to the importance of understanding addition and
subtraction in math. Learning how demand and supply affect prices is fundamental
to understanding how markets work.
Law of Demand and Supply
In this chapter you will read about the law of demand and
the law of supply—laws that make logical sense in the same
way that the law of gravity assures that you won't fly into
space as the earth revolves. The law of demand basically states
two things: (1) if the price of a product goes down, more
of it will be purchased; and (2) if the price of a product
goes up, less of it will be purchased. The law of supply also
basically states two things: (1) if the price of a product
goes up, suppliers will want to offer more of it for sale;
and (2) if the price of a product goes down, suppliers will
offer less of it for sale.
Shortages and Surpluses
We all follow these laws.
When there is a shortage of something, buyers are willing
to pay more for it. And we could reasonably expect that such
a shortage and higher prices would cause producers to enter
the market. In a similar fashion, when there is a surplus
of something, suppliers must lower the price to get rid of
their product. This chapter will explain how and why demand
and supply work the way they do.
