4.2 Supply and Demand



When people want to make money, they try to find something that people need or want, such as a type of cold drink or a T-shirt for a rock band concert. Economists call this a demand. To meet this demand, people (vendors) will sell these goods. This is called the supply. The price for these goods is determined by finding the price at which buyers are willing to pay the vendor's price.




In the graph (Figure 1), the red line represents demand for a product. In this case, it is T-shirts. The blue line represents the supply of T-shirts. Sellers want to sell T-shirts for the most amount of money they can, and buyers want to buy it for the cheapest possible price. At some point, the two points must meet. The price at which the seller is willing to sell a T-shirt is equal to the amount a buyer is willing to pay for it. This is referred to as the equilibrium price.


What would happen if another T-shirt seller, a competitor, decided to try to meet the demand of buyers for T-shirts at a concert? The demand for T-shirts is still the same. However, the supply has suddenly increased. People are used to buying from the first vendor, so the competitor drops the price of her T-shirts to attract customers. To keep up with the competition, the first seller must do the same.


Fans at a rock concert generally want to buy a T-shirt to celebrate their attendance at the concert. A seller wants to make money, and recognizes this demand. As the seller gains experience, she realizes that some people prefer black T-shirts over white or blue, so she concentrates on meeting that want. To make more money, it is important that suppliers discover what people want, and then supply it. At the same time, other suppliers want to make money. This competition will fuel better products and better prices for buyers.
The downside of the "invisible hand" is its "collateral damage" so to speak—the worker who becomes unemployed when his or her work loses value, becomes redundant, or is no longer needed.