Supply and Demand
Supply and demand is the model that explains how prices are determined in markets. Demand is the relationship between a good’s price and the quantity that buyers are willing to purchase at that price — generally, lower prices mean more demand. Supply is the relationship between price and the quantity that sellers are willing to produce — generally, higher prices mean more supply. The market price is the price at which the quantity demanded equals the quantity supplied: the equilibrium.
The model was formalized by Alfred Marshall in Principles of Economics (1890), though its elements had been developing for a century before that. Marshall’s contribution was the geometric framework — the supply and demand curves crossing at an equilibrium point — that remains the starting point of economic analysis. The model’s power is its generality: it applies, with modifications, to labor markets (wages are the price of labor), financial markets (interest rates are the price of borrowed money), housing markets (rent is the price of occupancy), and digital markets (CPMs are the price of audience attention).
A demand shift occurs when something other than price changes buyers’ behavior. If a health study shows that coffee reduces heart disease risk, demand for coffee increases — buyers are willing to pay more at every price level. The demand curve shifts rightward, and the equilibrium price rises. A supply shift occurs when something other than price changes sellers’ costs or capacity. If a drought destroys coffee crops, supply decreases — the supply curve shifts leftward, and the equilibrium price rises again, but for a different reason.
The model has important limitations. It assumes many buyers and sellers with no individual power to set prices (perfect competition), complete information about quality and alternatives, and no transaction costs. These assumptions rarely hold exactly. In markets dominated by a few sellers (two-sided markets like digital advertising, for example), prices are shaped as much by platform power and strategic behavior as by the intersection of supply and demand curves. The model is a starting point for analysis, not a complete description of how any particular market works.