A graph of supply and demand. Price is on the vertical axis, and quantity is on the horizontal axis. Demand and supply curves meet at an equilibrium.

The graph above shows the concept of “supply and demand.” This is a vital part of Adam Smith’s ideas, and a foundation of economics. To help you interpret it, think about a product, like ice cream. “Supply” is how much ice cream is available. “Demand” is how much people are willing to pay for it.

How much does ice cream cost? If there is a high supply, ice cream will be cheap. Maybe the store will have a sale. Once people see that there is cheap ice cream, they will buy more of it. Demand goes up. As people eat more ice cream, the supply goes down. Now that there is less ice cream, people are willing to pay more. The price goes up. If the price goes up high enough, ice cream makers are motivated to make more ice cream.

In this system, no one “decides” what the price will be. Customers respond to the price and the supply. Makers and sellers respond to the demand. The price rises and falls. It naturally finds a “correct” place.

Have you ever had an experience with supply and demand? Do you know about something that became valuable because it was rare? Or something that got cheap because there was too much of it? Describe your experience.


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