This chapter introduced the concepts of supply and demand, two of the most important ideas in economics. Using the simplified supply and demand framework, we examined a variety of topics, including equilibrium price and quantity, the effects of shocks to supply and demand, and elasticities.
But, the various cases we looked at in this chapter are, for the most part, simplified and abstract. In reality, measuring a market’s demand and supply curves and determining the equilibrium price and quantity can be complicated. For example, firms hoping to make production decisions based on the types of analysis we’ve done here need to observe a wide range of data—prices, elasticities, demand curves, and so on—that are often not known. As a result, producers might rely on more trial-and-error practices than allowed for in our simplified model. Beginning with Chapter 6 and continuing through Part 3, we talk more about situations that producers face in the real world, and the production decisions they have to make, such as how much of a product to produce, how to produce it, and whether they should enter a particular market at all. And we see how these decisions are reflected in a firm’s supply curve. In the meantime, the simplified supply and demand framework we’ve developed here provides a valuable structure for delving into a deeper analysis of markets and equilibrium price and quantity in upcoming chapters.