Let’s review how far we have come. In Chapter 1, you read about four core principles of economics, and we made the promise that these principles would be the key ingredients of any economic analysis. Since then, we’ve applied these principles to a key market, the market for gasoline.
We began in Chapter 2 by considering the demand side—focusing on potential buyers of gasoline. It turns out the amount of gas that any individual is willing to buy depends on the price of gas, and this relationship is summarized by their individual demand curve. By adding up the demand of many consumers, we arrived at the market demand curve, which summarizes the total quantity of gas demanded by the market at each potential price.
In Chapter 3, we turned to the supply side, analyzing potential sellers of gasoline. The quantity of gas that a seller is willing to sell depends on the price of gas, and this relationship is also neatly summarized, this time by their supply curves. Adding up supply across different sellers yields the market supply curve.
Finally, in this chapter, we’ve seen how these market demand and supply curves reveal the market equilibrium, and how the market will tend to move toward producing the equilibrium quantity at the equilibrium price. It is this price that acts as the signal for some people to buy and others to sell, and hence determines what gets made, by whom, and to whom it is sold.
You’ve now covered an enormous amount of ground. In particular, you’ve developed a complete framework that you can use to analyze any competitive market, whether it’s the market for gas, food, shelter, or indeed anything else.
This supply-and-demand framework is very important. So if you feel unsure about any of this, go back and read these chapters again. Truly. It’s important. In fact, it is the basis of almost all economic analysis. The rest of economics comes down to developing these ideas in two directions. First, we’ll apply these insights to other important markets, such as the markets for labor, capital, and housing. And second, we’ll refine our analysis so that you can gain greater insight into the real world, where markets are not always perfectly competitive.