The importance of understanding demand and supply in economics could be compared to the importance of understanding addition and subtraction in math. Learning how demand and supply affect prices is fundamental to understanding how markets work.

Law of Demand and Supply
In this chapter you will read about the law of demand and the law of supply—laws that make logical sense in the same way that the law of gravity assures that you won't fly into space as the earth revolves. The law of demand basically states two things: (1) if the price of a product goes down, more of it will be purchased; and (2) if the price of a product goes up, less of it will be purchased. The law of supply also basically states two things: (1) if the price of a product goes up, suppliers will want to offer more of it for sale; and (2) if the price of a product goes down, suppliers will offer less of it for sale.

Shortages and Surpluses
We all follow these laws. When there is a shortage of something, buyers are willing to pay more for it. And we could reasonably expect that such a shortage and higher prices would cause producers to enter the market. In a similar fashion, when there is a surplus of something, suppliers must lower the price to get rid of their product. This chapter will explain how and why demand and supply work the way they do.