In Week 2, we examine Demand and Supply, chapters 2 and 3 in the text.

Here are three things to keep in mind when looking at Demand and Supply. (Or Supply and Demand, the word order varies by author.)

ONE. There are many factors that affect whether or not someone will buy Good A or produce Good B, but demand and supply analysis begins with assuming that the only important factor is price. That self-conscious approach to analysis, where “everything else is kept equal,” is called ceteris paribus (in Latin). Another way to put is that, when we simplify reality, we "bracket" the other factors that we are not focusing on. So a simple model of demand and supply that looks at just price and quantity "brackets" factors like the income of consumers and the expectations of businesses.

TWO. Economists seldom have complete data sets that show the sort of Price and Quantity pairs given in textbook examples. We can collect data and estimate supply and demand curves, using mathematical tools like regression analysis. Businesses also conduct experiments by raising and lowering prices, and looking for the results in changes in sales. In the 21st century, this market experimentation can be programmed into online shopping interfaces like Amazon. (If you use Amazon, leave a bunch of things in your shopping cart to buy later, and you will see the prices changing every so often, sometimes just a few cents.)

THREE. It is important to keep in mind that a market is a social institution that exists in time and space. So the market for bananas in Beverly Massachusetts consists of perhaps 10 stores and 20,000 potential buyers, and is limited to a time period of perhaps a week or two. The specifics of markets work differently in different cultures. For example, the prices of most consumer products in the US are not negotiated, and thus people buy at whatever the “shelf price” happens to be. But in some parts of the Mediterranean world, bargaining or haggling is common. For an example, see Rick Steves' How to Haggle: Tips for Bargaining Overseas for instructions.