When a cold snap hits Florida, the price of orange juice rises in supermarkets throughout the country. When the weather turns warm in New England every summer, the price of hotel rooms in the Caribbean plummets. When a war breaks out in the Middle Fast, the price of gasoline in the United States rises,and the price of a used Cadillac falls. What do these events have in common? They all show the workings of supply and demand.
Supply and ilenucil are the two words economists use must often—and for go«*! reason. Supply and demand are the forces that make market economics work. They determine the quantity of each good produced and the price at which it is sold. If you want to know how any event or policy will affect the economy, you must think first about how it will affect supply and demand.
This chapter introduces the theory of supply and demand- It considers how buyers and sellers behave and how they interact with one another. It shows how supply and demand determine prices in a market economy and how prices, in turn, allocate the economy's scarce resources-
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