Supply and Demand

One of the most basic concepts of economics is Supply and Demand. These are really two separate things, but they are almost always talked about together.Supplyis how much of something is available. For example, if you have 9 baseball cards, then yoursupplyof baseball cards is 9. If you have 6 apples, then yoursupplyof apples is 6.Demandis how much of something people want. It sounds a little bit harder to measure, but it really isn't. To measuredemand, we can use a very simple numbering system, just like thesupplyone. If 8 people want baseball cards, then we can say that thedemandfor baseball cards is 8. If 6 people want apples, then we can say that thedemandfor apples is 6.Did you notice that the baseball cards supplywas one more than the baseball cards demand? Did you also notice that the apples supply was equal to the apples demand? We'll get to that soon.Sowe havesupply, which is how much of something you have, anddemand, which is how much of something people want. Put the two together, and you havesupply and demand.Now,how do you show the relationship between the two? One way is to use thepriceof something. Generally speaking, the price of something will go up if the demand goes up. Why? Because the seller thinks he or she can get more money for whatever he or she is selling.Ifmore people want something, they will be willing to pay more for it. A good example is the newest basketball shoes. Everybody wants them, and they will be willing to pay more than they normally would to get them. Thedemandgoes up. Why? Because more people want them. Thepricealso goes up. Why? Because the seller knows he or she can get more money for the product because it isin demand.Inthe same way, the price will go down when the demand goes down. When the new style of basketball shoes comes out, everyone wants the new shoes. The old shoes don't seem so new anymore. The seller still wants to sell those older shoes, since he or she has a lot still in stock. So, thepricegoes down. Why? The seller hopes that people will be willing to buy the older shoes at a lower price. After all, the older shoes aren'tthatmuch older or worse than the brand new shoes.Whatdoes all this mean? It means that you can tracksupplyanddemandby also trackingprice. If something has a high price, you can usually conclude that thedemandfor that item is low. (This is not always the case; it isusuallythe case.) In the same way, if something has a low price, you can usually conclude that thedemandfor that item is high.Why?First of all, a seller has already paid money for what he is trying to sell. A bookseller has paid $4 for each paperback book he has on his shelves. He has bought 1,000 books and paid $4,000. He is selling those same books for $5 each. He hopes to sell all of them at $5 each and get a total of $5,000.Butwhat if thedemandis low and no one wants to buy them? The seller wants to make some of his money back, so he might lower the price. He is already out the $4,000. He can't change that. But he can change how money he is bringing in. If he lowers the price of the books to $4 each, he breaks even on each book but still takes in some of the money he had spent to buy the books in the first place. And this bookseller would have had to lower the price of the books because thedemandwas low.Thereverse can also be true. If the bookseller decides that he wants to get as much money as he can back, then he might raise the price of the books to $6 each, figuring that he will sell fewer books overall but will get more money for each book he sells.Whywould the bookseller do all of this? He would have paid money for those books in the first place, and he wants to decrease hissupplyof those books for two reasons: so he can get his money back and so he can stock more books. In the same way, the bookseller could try to decrease hissupplyof a certain book by lowering theprice, thereby creating moredemand.Whatdoes it all mean?SupplyandDemandare two very strong market concepts. Studying the two of them can give you a good idea of what people like to buy and sell. And you can track bothsupplyanddemandby comparing the price of an item over time.To study Supply and Demand is to understand economics at its most basic. What does supplymean? Use information from the reading to explain what supply means. What doesdemandmean? Use information from the reading to explain what demand means.