Economics, 3rd Edition

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SUPPLY AND DEMAND: 

HOW MARKETS WORK

PART 2

I

n April 2012, the price of winter wheat on global markets was around 

€209 per metric tonne. By September 

2012 the price had risen to 

€277 per metric tonne, a rise of around 33 per cent. One of the reasons for 

the rise in price was that wheat-producing states in the United States suffered a drought which damaged 

the wheat crop. Other crops such as corn and soya beans had also been rising in price. One of the con-

sequences of this is that livestock farmers faced increased costs of production – some arable crops are 

used in livestock feedstuffs. Some farmers had been unable to afford to feed their animals and so had to 

send them for slaughter which led to beef prices falling.

In November 2006, the average house price in the UK was 

£200,000 (€250,000). In January 2009, 

this had fallen to 

£164,000 (€205,000). When major sporting events are held in a country, such as the 

World Cup or the Olympics, hotel prices in the areas around the venues tend to rise. In the Holy month of 

Ramadan, many Muslims find that the price of food rises quite sharply. If you book an airline flight several 

months in advance of a trip the seat prices tend to be lower than if you try booking two weeks before your 

trip. What do these events have in common? They all show the workings of supply and demand.

Supply and demand are the two words that economists use most often – and for good reason. Supply 

and demand are the forces that make market economies work. They determine the quantity of each good 

produced and the price at which it is sold. If you want to know how any event or policy will affect the eco-

nomy, you must think first about how it will affect supply and demand.

This chapter introduces the theory of supply and demand. It considers how buyers and sellers behave 

and how they interact with one another. It shows how supply and demand determine prices in a market 

economy and how prices, in turn, allocate the economy’s scarce resources.