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Supply and Demand 2

The pursuit of gold has driven people to extremes for centuries. Much of the initial exploration of the Americas was funded with the hope of acquiring gold. Centuries later, the discovery of gold at Sutter’s Mill in Coloma, California, in 1848 triggered a gold rush that led 300,000 men, women, and children to migrate to California, turning San Francisco from a sleepy hamlet to a thriving city.

In recent years, the search for gold has taken on a decidedly modern flavor. It might surprise you to know that as many as 400,000 Chinese workers currently spend their days mining for gold. But they aren’t panning for gold in a stream or working in a gold mine. Rather, they are seated in front of computer screens, logged onto online games like Guild Wars 2 or World of Warcraft, using virtual picks and axes to mine virtual gold that they sell on eBay to players willing to pay real money for the virtual gold that serves as the game’s currency.

Whether the gold is real or virtual, the economic forces at work that determine its price and how much of it is “mined” are the same. In this chapter, we explore these forces, the two most powerful forces in economics: supply and demand.

Armed with an understanding of supply and demand, we answer the most fundamental questions in economics: How do consumers and producers interact in the market for a good or service to determine how much is sold and at what price? This chapter outlines the basic supply and demand model. We first introduce the concept of the demand curve, which embodies consumers’ desires for goods, and then move on to the supply curve, which represents producers’ willingness to produce those goods. We explain why these concepts are so useful in describing and analyzing markets, especially when we combine them to understand the concept of market equilibrium. We then analyze how equilibrium prices and quantities are influenced by the variety of forces that affect markets: consumer tastes, input prices, overall economic activity, new goods that can be substituted for an existing good, innovations that make a product easier to produce, and so on. Finally, we dig deeper and look at how quantities demanded and supplied respond to price changes and discuss how they affect market equilibrium.