Supply, Demand, and the Invisible Hand

Introduction

Transactions—payments of money in return for goods and services—occur because various consumers, businesses, and government agencies have various wants and needs. In GDP and the Players Three, you learned that these transactions all add up to gross domestic product, or GDP. Economists also refer to GDP as total demand. Economists not only analyze total demand; they also analyze demand for specific goods and services. The demand for a specific item depends on many factors, including its uses and importance, the size and age of the population, the prevailing fashions and tastes, and, of course, its price.

In a market economy, if there is demand for something there will surely be people willing to supply it. In that sense, supply is the flip side of demand. Economists think and talk in terms of the supply of cars and housing, the supply of labor and materials, and so on. The supply of a product or service depends on many things including the resources and productive capacity devoted to producing it and, again, its price.

In a market economy, the interaction of demand—wants and needs—and supply—resources and productive capacity—largely determine what is produced and how it is allocated.

This section examines the dynamics of supply and demand and the interaction of these two essential market forces. It also shows how these forces determine prices in a market.

book cover

Excerpted from The Complete Idiot's Guide to Economics © 2003 by Tom Gorman. All rights reserved including the right of reproduction in whole or in part in any form. Used by arrangement with Alpha Books, a member of Penguin Group (USA) Inc.

To order this book direct from the publisher, visit the Penguin USA website or call 1-800-253-6476. You can also purchase this book at Amazon.com and Barnes & Noble.

stay connected

Sign up for our free email newsletters and receive the latest advice and information on all things parenting.

Enter your email address to sign up or manage your account.

Facebook icon Twitter icon Follow Us on Pinterest

editor’s picks

highlights

Healthy Smile Checklist for Kids
Have better dental check-ups with this free printable checklist that helps keep your child flossing, brushing, and smiling! Brought to you by Philips Sonicare.

Kindergarten Readiness App
It's kindergarten registration time! Use this interactive kindergarten readiness checklist, complete with fun games and activities, to practice the essential skills your child needs for this next big step. Download the Kindergarten Readiness app today!

8 Easter Egg Decorating Ideas
Need some fun ideas for decorating Easter eggs with the kids? Look no further for colorful and cool designs!

7 Ways to Curb Kids' Exposure to Violence
American children are exposed to violence more often than you might think. Learn how to limit your child's exposure to violence and manage the mental health and behavioral effects it can cause.