Supply and demand
This chapter explains the two most famous building blocks of economics, supply and demand. These tools are crucial to understanding markets and how they function to allocate goods and resources. The supply curve is derived. We then explore what causes fi rms to produce goods, what resources to use in production, and how the fi rms respond to changes in prices of either inputs or outputs. Attention then turns to demand. The Law of Demand is a major feature of economics. Consumer responses to changes in relative prices, income, and other variables are carefully explained and explored.