Supply and Demand
Supply and demand are the most fundamental tools of economic analysis. Most applications of economic reasoning involve supply and demand in one form or another. When prices for home heating oil rise in the winter, usually it is because the weather is colder than normal and, thus, demand is higher than usual. Similarly, a break in an oil pipeline creates a short-lived gasoline shortage, as occurred in the Midwest in 2000. The price of DRAM, or dynamic random access memory, used in personal computers, falls when new manufacturing facilities begin production, increasing the supply of memory.
This chapter sets out the basics of supply and demand, introduces equilibrium analysis, and considers some of the factors that influence supply and demand. Dynamics are not considered, however, until Chapter 4, The U.S. Economy, which focuses on production; and Chapter 5, Government Interventions introduces a more fundamental analysis of demand, including a variety of topics such as risk. In essence, this is the economics “quickstart” guide to supply and demand, and we will look more deeply at these issues in the subsequent chapters.
