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What makes the prices of oil and gasoline double in
just one year? Will these prices keep on rising? Are the oil com-
panies taking advantage of people? This chapter enables you to
answer these and similar questions about prices—prices that
rise, prices that fall, and prices that fluctuate.
You already know that economics is about the choices peo-
ple make to cope with scarcity and how those choices
respond to incentives. Prices act as incentives. You’re going to
see how people respond to prices and how prices get deter-
mined by demand and supply. The demand and supply model
that you study in this chapter is the main tool of economics. It
helps us to answer the big economic question: What, how,
and for whom goods and services are produced?
At the end of the chapter, in Reading Between the Lines ,
we’ll apply the model to market for gasoline and explain
why the price increased so sharply in 2008.
Demand and Supply
PART TWO How Markets Work
3
53
■
Describe a competitive market and think about a price as
an opportunity cost
■
Explain the influences on demand
■
Explain the influences on supply
■
Explain how demand and supply determine prices and
quantities bought and sold
■
Use the demand and supply model to make predictions
about changes in prices and quantities
After studying this chapter,
you will be able to:

Let’s begin our study of demand and supply,
starting with demand.
54
CHAPTER 3 Demand and Supply
◆
Markets and Prices
When you need a new pair of running shoes, want a
bagel and a latte, plan to upgrade your cell phone, or
need to fly home for Thanksgiving, you must find a
place where people sell those items or offer those ser-
vices. The place in which you find them is a market.
You learned in Chapter 2 (p. 44) that a market is any
arrangement that enables buyers and sellers to get
information and to do business with each other.
A market has two sides: buyers and sellers. There
are markets for goods such as apples and hiking boots,
for services such as haircuts and tennis lessons, for
resources such as computer programmers and earth-
movers, and for other manufactured inputs such as
memory chips and auto parts. There are also markets
for money such as Japanese yen and for financial
securities such as Yahoo! stock. Only our imagination
limits what can be traded in markets.
Some markets are physical places where buyers and
sellers meet and where an auctioneer or a broker
helps to determine the prices. Examples of this type
of market are the New York Stock Exchange and the
wholesale fish, meat, and produce markets.
Some markets are groups of people spread around
the world who never meet and know little about each
other but are connected through the Internet or by tele-
phone and fax. Examples are the e-commerce markets
and the currency markets.