Introduction to Applications of Demand and Supply

When economists say “markets work,” they are remarking on the tendency of market participants to adjust to a new equilibrium price and a new equilibrium quantity after something happens. Consider what happens when medical research suggests that the consumption of eggs increases short-term memory. What would economists predict would happen to the equilibrium price and equilibrium quantity after this study is published? Consider what would happen to the labor market if people thought that the lowest paid workers were paid too little and campaigned for a higher minimum wage. Finally, consider what happens when you are buying something on an internet auction at a price for less than what you would have been willing to pay.

Economists use the supply and demand model to predict how equilibrium price and equilibrium quantity change as the demand and/or supply curve shifts. Economists use that same supply and demand model to articulate the consequences when something other than market forces dictate the price that will be changed. Finally, economists use the same supply and demand model to measure the degree of efficiency and inefficiency that exists in a market. As you can see, the supply and demand model used by economists is both predictive and prescriptive.