Supply And Demand - Chapter 3
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37C H A P T E R
3
Supply and Demand
Father Guido Sarducci, a character on the early Saturday Night Live shows, once
observed that the average person remembers only about five minutes worth of mate-
rial from college. He therefore proposed the “Five Minute University,” where you’d
learn only the five minutes of material you’d actually remember and dispense with
the rest. The economics course would last only 10 seconds, just enough time for stu-
dents to learn to recite three words: “supply and demand.”
Of course, there is much more to economics than these three words. But many
people do regard the phrase “supply and demand” as synonymous with economics
and the concept is often misused. But surprisingly few people actually understand
what the phrase means. In a debate about health care, poverty, recent events in the
stock market, or the high price of housing, you might hear someone say, “Well, it’s
just a matter of supply and demand,” as a way of dismissing the issue entirely.
Others use the phrase with an exaggerated reverence, as if supply and demand were
an inviolable physical law, like gravity, about which nothing can be done. So what
does this oft-repeated phrase really mean?
First, supply and demand is just an economic model—nothing more and noth-
ing less. It’s a model designed to explain how prices are determined in certain types
of markets.
Why has this model taken on such an exalted role in the field of economics?
Because prices themselves play such an exalted role in the economy. In a market sys-
tem, once the price of something has been determined, only those willing to pay that
price will get it. Thus, prices determine which households will get which goods and
services and which firms will get which resources. If you want to know why the cell
phone industry is expanding while the video rental industry is shrinking, or why
homelessness is a more pervasive problem in the United States than hunger, you
need to understand how prices are determined. In this chapter, you will learn how
the model of supply and demand works and how to use it. You will also learn about
the strengths and limitations of the model. It will take more time than Guido
Sarducci’s 10-second economics course, but in the end you will know much more
than just those three words.
MARKETS
Put any compound in front of a chemist, ask him what it is and what it can be used
for, and he will immediately think of the basic elements—carbon, hydrogen, oxygen,
and so on. Ask an economist almost any question about the economy, and he will
immediately think about markets.
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