Introduction

This chapter draws together the two threads built up in Chapters 2 and 4 -- consumer behaviour and firm behaviour -- for the case where both consumers and firms are price takers. Chapter 2 showed that an individual's demand curve tells us how much of a commodity she is willing to buy at each price, and that the market demand curve aggregates this across all consumers. Chapter 4 showed that an individual firm's supply curve tells us how much a profit-maximising firm wishes to sell at each price, and that the market supply curve aggregates this across all firms.

This chapter combines both sides of the market to study how demand-supply analysis determines the price at which the market settles -- its equilibrium -- and examines how that equilibrium responds to shifts in demand or supply. It closes with a look at some real-world applications of demand-supply analysis.