Chapter 6 of Shawn Ritenour’s Foundations of Economics examines what happens when the supply or demand of a good or service in the marketplace changes. Ritenour makes the point that confusion sometimes results from a change in market prices. When the price of, say, coffee rises, this is not necessarily indicative of a rise in demand. Demand may be exactly the same as before, but a reduction of supply may have led to the price increase. The reverse is also true; a price may change even though supply is constant if demand changes.
Demand or supply can only be said to change when the preferences of the relevant group change, leading it collectively to value a good or service more or less. Ritenour shows that, other things being equal, an increase in demand will result in more marginal units being sold at a higher price, whereas a decrease in demands will result in fewer marginal units being sold at a lower price. The reason is that in the former case people are willing to pay higher prices in general, and this leads to more sellers entering the market because they are able to sell at a price that satisfies them. In the latter case, people are only willing to pay lower prices, and this leads to sellers exiting the market.
On the flip side, an increase in supply will lead to more marginal units being sold at a lower price, whereas a decrease in supply will result in fewer marginal units being sold at a higher price. In the former case, sellers are willing to sell at lower prices, and this brings more buyers into the market who were not willing to pay the original, higher price. In the latter case, sellers insist on higher prices, and buyers on the margin exit the market, unwilling to pay those prices.
Ritenour walks the reader through several different things that can cause a change in demand or supply. For demand, changes in buyers’ income and tastes are important factors. A change in an area’s population inevitably affects demand there. An expectation of a change in future prices may affect people’s decision to buy or not buy in the present. Finally, changes in the markets for related goods can affect a good’s demand. On the supply side, investment in production, a change in the prices of factors of production, improving technology, an increase in the number of sellers, and a change in the market for complementary goods can all have an impact.
The chapter closes with a nice statement about why economics is so important to the average person. Prices change around us all the time. Only through a comprehension of the principles discussed in this chapter can we really understand these changes.