Decoding the Market

In modern economy, the greatest part of economic activity is carried out in markets, the place where the buyers and sellers meet to change money for a good or a service. A market does not have to be a concrete place and in fact, there are many markets that only exist in cyberspace these days. However, independent from the institutional order that the markets have, they all seem to behave in the same way, so we can study them in a general way instead of having to study them separately.

It turns out that a very simple model, called supply and demand, and describes very well how the markets work, independent from the good or service that is being bought or sold.

This model is able to separate, in a very accreted way, the buyers from the sellers, and then resumes the behavior of each group with one line in a graphic. The curve of the demand captures the behavior of buyers, while the curve of supply captures the behavior of the sellers. By placing these two curves on a graph, economists can show how the buyer and sellers interact to determine how much a specific good is sold, as well as the price it is sold at.

When people want to buy something, this desire is what is known as demand. When demand is talked about, economists are not talking about thinking about a desire or dreaming it up. When talking about demand, economists refer to the amount of people that are willing to buy something and people that can pay for it.