Supply and Demand Basics
Now that we have mastered the laws of supply and demand, we are ready to learn about the market. In simple terms, the market is defined as the place where people buy and sell goods or services. The market for some products; groceries for example, is relatively local, while the market for other products such as wheat, can be international. 
Due to the advent of the Internet, the market does not need to be located at a specific location. Many businesses now supply their products through cyberspace, a place that allows consumers to shop both local and international markets. Because the laws of supply and demand define capitalism, one thing that can be determined from this information is that the market is essential to the success of a capitalistic society.
We need to take a moment to understand individual and market demand, and individual and market supply. Individual demand could be defined as how much Nothing a single person would be willing to purchase at different prices. Market demand is the total amount of Nothing purchased by all of the consumers at different prices. For our example, we will say the price for Nothing is $15. At a price of $15, Sally will buy 9 Nothings, Bob will buy 4 Nothings, and Harry will buy 2 Nothings. Each of these consumers creates their own individual demand. When we add these individual demands, we get a total of 15 Nothings. Thus, the market demand for Nothing at $15 is 15. (Slavin, 404-405)
Individual and market supply works in a fashion similar to individual and market demand. In the beginning, I had a monopoly on the supply of Nothing. I am an individual supplier. Since Nothing has increased in popularity, more companies have started to supply Nothing, toppling my monopoly and introducing competition into the market. Each of these companies is an individual supplier. When you add together the amount supplied by each individual supplier, you learn the market supply. (Slavin, 412)
There are many factors that can bring about changes in demand. These determinants of demand include a change in price of a good or service. When price goes down, the demand increases. Change in income is another determinant of demand. When income is higher, consumers have more capital available to spend on purchases, thus the demand increases. Likewise, when wages are decreased, consumers have less available capital, and demand decreases. Other determinants of demand include changes in preferences, changes in price expectations, and changes in population. (Slavin, 409-411)
As is the case with demand, determinants of supply create changes in supply. Determinants of supply include technological advances. For example, the technological advances in computer production have made producing computers easier and less expensive. Another determinant of supply is a change in the cost of production. Because computers are now less expensive to produce, suppliers are able to market them for less. These lower prices increase the market demand for these products, which in turn allows the suppliers to supply even more of them. The price of other goods is also a determinant of supply. When the price of a similar good rises, all supplies are motivated to produce more. Likewise, when the price falls, suppliers are less willing to produce. The other determinants of supply are changes in the number of suppliers, changes in taxes, and the expectation of future price changes. (Slavin, 414-16)
Now that we understand the market, and the determinants of supply and demand that can change the market equilibrium price, let us take a closer look at the results of changes in demand, or changes in supply. First, we’ll take another look at our graph for the supply and demand for Nothing. As we can see from this graph, the market equilibrium price is $15, and the market equilibrium quantity is 15.
If it suddenly became easier and less expensive to produce Nothing, suppliers would start producing more. This determinant of supply would cause a change in supply. The result of this change in supply is shown in our second chart. As you can see from this chart, suppliers are producing more Nothing at every price, and the market equilibrium price has changed. Look carefully at the spot where the demand curve crosses the increased supply curve. You can see that the new market equilibrium price is $12.50, and the new market equilibrium quantity is 17.5. Because of the increase in supply, the market equilibrium price dropped while the market equilibrium quantity increased.
Our third, and final chart this week, shows us what happens when a change in supply occurs at the same time as a change in demand. Take a close look at the spot where the rising demand curve crosses the rising supply curve. We can see that out market equilibrium price is $15, and our market equilibrium quantity is 20. Chart number three is full of information on changes to supply and demand. For example, if we look at the spot where our original supply line crosses our increased demand line, we see that an increase in demand alone would cause our market equilibrium price to rise from $15 to $17.50, while our equilibrium quantity would rise to 17.5. Thus we can see that an increase in demand leads to an increase in the market equilibrium price, and an increase in the market equilibrium quantity.
This concludes our analysis of the laws of supply and demand, the determinants of supply and demand, and the parts that individual and market supply and demand play in a capitalistic society. Stay tuned next week as we plunge into the analysis of Costs and Market Structure.
