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Supply & Demand
Supply & Demand
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Table of Contents
Supply & Demand Analysis
The key concepts: what you need to know and (more importantly) why
The Law of Demand
Okay—let's start with a basic and simple fact: as the price of something falls, demand for it rises (aka more consumers will want it, so quantity increases); and as the price of something rises,...
The Demand Curve
To get a better picture of demand, economist construct graphs. They try to find out how many people are willing to buy an item at various prices, and then plot that information on a graph like t...
Diminishing Marginal Utility
Economists use the word utility to describe the ability of a good or service to satisfy some want we possess. A donut has utility if it can satisfy our hunger; a movie has utility if it satisfies...
The Income Effect
Income influences demand. As our income changes, our willingness and ability to buy a product changes. When you were working for the minimum wage, you may have been willing and able to pay only 75...
Substitution goods represent another factor influencing demand. A substitution good is one that has a similar utility as another—they both satisfy a similar need. If the cost of the substitutio...
Complementary goods also impact demand. Complementary goods are goods that go together or are related: beer and pretzels, cameras and film, polyester bell bottoms and platform shoes, Rogaine and...
Tastes and Preferences
Finally, consumer tastes may affect demand. Consumers may clamor for an item one year and ignore it the next. The clothing industry is particularly vulnerable to quickly changing tastes. How re...
Price Elasticity of Demand
There are some goods, however, that have relatively static demand curves. In particular, some goods remain in constant demand regardless of changes in the price. Demand for these goods is called...
The Supply Curve
But understanding demand is only half of the story. To understand the market we also need to understand supply. And as on the demand side of the equation, the basic law of supply is common sense:...
As useful (and fascinating) as supply and demand curves are on their own, they become even more valuable (and for economists, truly sublime) when combined. When we plot supply and demand for a pro...
Of course, not every market operates in perfect textbook fashion. Supply and demand meet perfectly only in perfect conditions—when there is large market in which many producers and consumers com...
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