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Week 2 Case Study: Supply and Demand
Overview
A market exists whenever buyers and sellers meet to exchange goods and services. A mall is a market, a street is a market, your classroom is a market, a garage sale is a market, and even the airplane you ride is a market. Markets are everywhere. Their primary purpose is to get suppliers (producers) and demanders (buyers) together to sell and buy at a price they both agree on.
Market demand represents the sum of the individual demand for a commodity (a good or a service) from buyers in the market. On the other hand, market supply represents the total quantity of a commodity that producers are willing and able to provide to the buyers at a given price level. Market equilibrium occurs where the quantity supplied equals the quantity demanded, and the market price (equilibrium price) is set at that quantity (equilibrium quantity).
The equilibrium price and equilibrium quantity are not static, however, meaning that they change due to changes in market demand or market supply.
A commodity or an idea might be a “hot item” and very popular at one point in time where people are willing to pay a high price for it, and producers will be willing to produce more of it because it is profitable. Smoking a cigarette at one point in time was considered a symbol of “a tough man” and smoking was acceptable everywhere, including inside hospitals! But what has changed for cigarettes? Whenever the demand for a commodity rises or declines, and whenever the production of a commodity expands or shrinks, it is certain that at least one market force or a set of market forces have taken place to cause this change.