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Microeconomics Essentials: How Markets Use Supply and Demand

Capítulo 1

Estimated reading time: 6 minutes

Microeconomics in practical terms

Microeconomics studies how individual decision-makers interact in specific markets. In practical terms, it asks: when many buyers want something and many sellers can provide it, how do they end up agreeing on a price and a quantity traded? The core idea is that prices are not chosen in isolation; they emerge from the push and pull between what buyers are willing to pay and what sellers are willing to accept.

In this course, you will repeatedly use one simple model to organize that interaction: supply and demand. It is not a perfect description of every real-world market, but it is a powerful starting point for predicting how changes (income, costs, rules, expectations) affect prices and quantities.

What “buyers” and “sellers” are doing

Buyers compare the benefit they expect from one more unit (a bottle of water, a ride, a haircut) to the price they must pay. If the price is low relative to the benefit, they buy more; if it is high, they buy less.
Sellers compare the price they can receive to the cost of providing one more unit. If the price is high relative to cost, they supply more; if it is low, they supply less.

When these choices meet in a market, the outcome is a price and quantity that are consistent with both sides’ incentives.

What counts as a “market”

A market is not necessarily a physical place. It is a structured way for exchange to happen. For our purposes, a market has four ingredients:

A good or service that is being traded (e.g., bottled water, apartments, tutoring hours).
Buyers who want the good/service and can pay.
Sellers who can provide the good/service.
Rules of exchange that shape how trade occurs (prices posted or negotiated, taxes, quality standards, delivery constraints, payment methods, etc.).

Those rules matter because they can change incentives. For example, a per-bottle deposit changes the effective price faced by buyers; a licensing requirement changes who can sell and at what cost.

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The core model you will use throughout the course

The supply-and-demand model is a way to summarize many individual decisions into two relationships:

Demand: the relationship between price and the quantity buyers are willing and able to purchase (holding other factors constant).
Supply: the relationship between price and the quantity sellers are willing and able to sell (holding other factors constant).

“Holding other factors constant” is crucial. It means we first study how quantity responds to price alone, then later add what happens when those other factors change (income, tastes, input costs, technology, number of sellers, and so on).

Your graphing toolkit (used in later chapters)

Most of the course will translate economic stories into graphs and then back into predictions. Here is the basic toolkit.

1) Axes: what goes where

In supply-and-demand graphs:

Price (P) goes on the vertical axis.
Quantity (Q) goes on the horizontal axis.

This convention is widely used because it makes it easy to compare supply and demand on the same graph and to interpret equilibrium as an intersection.

2) Reading a point on a curve

A point on a demand curve is an ordered pair (Q, P) that tells you: “At price P, buyers want quantity Q.” A point on a supply curve tells you: “At price P, sellers offer quantity Q.”

Example (interpretation only): if a demand curve includes the point (1,000 bottles, $1.00), that means at $1.00 per bottle, buyers collectively want to buy 1,000 bottles over the relevant time period (say, per day).

3) Movement along a curve vs. shift of the curve

This distinction is one of the most important habits to build early.

Movement along a curve happens when price changes and everything else is held constant. You stay on the same curve and move to a different point.
Shift of the curve happens when something other than price changes (income, tastes, number of buyers, input costs, technology, regulations, expectations). The entire relationship between price and quantity changes, so the curve moves.

Question you ask	If the answer is “yes”	Graph action
Did the good’s own price change (and we are holding other factors constant)?	Quantity demanded/supplied changes because of price	Move along the existing curve
Did something else change (income, costs, rules, etc.)?	Demand or supply relationship changes at every price	Shift the curve

Step-by-step: how to decide “move” vs. “shift”

Name the market precisely (good/service, location, time period). Example: “bottled water sold in City A convenience stores this week.”
Identify what changed in the story (price of bottled water, incomes, shipping costs, weather, etc.).
Ask: Is the change the good’s own price? If yes, it is a movement along demand or supply (depending on which side is responding).
If not price: decide whether the change affects buyers (demand shifter) or sellers (supply shifter).
State the direction (demand shifts right/left; supply shifts right/left) and what that implies for equilibrium price and quantity (later chapters will formalize this).

Anchor example: bottled water in a city

To make the model concrete, we will use a recurring example: bottled water in a city. Imagine a city where residents and visitors buy bottled water from convenience stores, kiosks, and vending machines.

Define the market clearly

Good: 500ml bottled water.
Buyers: commuters, tourists, office workers, event attendees.
Sellers: retailers (stores, kiosks, vending operators) who purchase inventory from wholesalers.
Rules of exchange: posted prices, sales tax, deposit rules (if any), store hours, and restocking logistics.

How the graph would represent this market

On a supply-and-demand graph for bottled water:

A demand curve summarizes how many bottles buyers would purchase at each possible price (per bottle), holding constant things like weather, income, and availability of water fountains.
A supply curve summarizes how many bottles sellers would offer at each possible price, holding constant things like wholesale cost, delivery capacity, and store staffing.

Practice: movement vs. shift using the bottled-water story

Use these mini-scenarios to apply the toolkit.

Scenario A (movement along demand): A store raises the posted price from $1.50 to $2.00 while nothing else changes. Buyers respond by purchasing fewer bottles at the higher price. This is a movement along the demand curve (same demand curve, different point).
Scenario B (demand shift): A heat wave hits the city. At every price, more people want bottled water than before. That is a rightward shift of demand.
Scenario C (supply shift): A trucking disruption raises the wholesale cost of bottled water delivered to retailers. At every price, sellers are willing to offer fewer bottles than before. That is a leftward shift of supply.

As new concepts are added later (elasticity, taxes, price controls, externalities), we will return to this bottled-water market and update the story while using the same graphing language: axes, points, movements, and shifts.

Now answer the exercise about the content:

In a city’s bottled-water market, which situation is best described as a shift of the demand curve rather than a movement along it?

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You missed! Try again.

A demand shift happens when something other than the good’s own price changes buyers’ willingness to purchase at every price. A heat wave increases demand at all prices, shifting the demand curve right.