We are now ready to study the important question of how markets work.
To do so we will develop a simple model of demand and supply. And
though there is much more to economics than just demand and supply,
this simple model is our essential starting point for understanding how a
market economy functions.
We start with how the demand for any product is determined. After doing
the same for supply, we put demand and supply together to see how they
interact. Finally, we see how market prices and quantities are determined,
and how changes in various exogenous variables affect the market
outcomes.
As we will see throughout this book, the concepts of demand and supply
help us to understand the price system’s successes and failures and the
consequences of many government policies.
This chapter deals with the basic elements of demand, supply, and price.
In the next two chapters we use the theory of demand and supply to
discuss such issues as the effects of gasoline taxes, legislated minimum
wages, rent controls, and the burden of payroll taxes.