ABSTRACT
The economic theory of supply and demand is an exceptionally useful example of a "thought experiment" that seeks to describe, in abstract terms, how people make their decisions about buying and selling. The theory provides a simple, elegant picture of how potential sellers decide how much of a good or service to offer to sell on a market and how potential buyers decide how much to purchase. The theory then goes on to show how a well-functioning market coordinates these decisions to determine price and quantity traded. Notice that both supply and demand increases tend to increase the equilibrium quantity transacted. Their price effects, however, go in opposite directions. Increases in supply make the good more plentiful, driving its equilibrium price down. Increases in demand drive up the equilibrium price. Likewise, decreases in supply and demand both tend to decrease the equilibrium quantity transacted.
