Your goal should be to understand the underlying model so you can use it to analyze any market. Even though demand and supply diagrams have many labels, they are fundamentally the same in their logic. Demand and supply is not primarily a list of examples it is a model to analyze prices and quantities. Just as it would be foolish to try to learn the arithmetic of long division by memorizing every possible combination of numbers that can be divided by each other, it would be foolish to try to memorize every specific example of demand and supply in this chapter, this textbook, or this course. The demand and supply model is the second fundamental diagram for this course. Why are demand and supply curves important? Instead, each consumer reacts according to that person’s preferences and budget set, and each profit-seeking producer reacts to the impact on its expected profits. In a market-oriented economy, no government agency or guiding intelligence oversees the set of responses and interconnections that result from a change in price. In all of these markets, prices serve as a remarkable social mechanism for collecting, combining, and transmitting information that is relevant to the market-namely, the relationship between demand and supply-and then serving as messengers to convey that information to buyers and sellers. Prices exist in markets for goods and services, for labor, and for financial capital.

The Market System as an Efficient Mechanism for Information The Market System as an Efficient Mechanism for Information.

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