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The core problem of microeconomics research is how to effectively allocate a given economic resource to various purposes. In the market economy, many producers produce a wide variety of goods, and it is the market price that guides the direction of resource allocation, so that scarce resources can be optimally allocated. Since market supply and demand are the basic forces that determine market prices, the analysis of supply and demand is the logical starting point of the general theoretical analysis of modern western economics.

First, the demand:

Demand refers to the quantity of goods that consumers are willing and able to buy at various possible prices in a certain period of time. But need refers to the desire of consumers to get a certain commodity. Demand is not a natural and subjective desire, but an effective need, which includes two conditions: consumers have the desire to buy and the ability to buy.

Consumers have the desire to buy a commodity because it has the ability to satisfy a certain desire of people, that is, utility. To be effective, a commodity must have two conditions: it must be useful and it must be scarce. Therefore, at every price level, the demand of consumers should be the quantity of goods that bring him the greatest utility.

The factors that affect the quantity of demand are: the price of the commodity itself (demand decreases with the increase of price and increases with the decrease of price), the income level of consumers (demand increases with the increase of income level and decreases with the decrease of income level), the price of related products (demand increases with the increase of price and decreases with the decrease of price when the price remains unchanged) and the preference of consumers (demand increases with the increase of preference). Decline with the decline of preference), consumer's price expectation of goods (demand rises with the increase of price expectation and falls with the decrease of price expectation), etc.

Demand curve is a curve drawn in mathematical form about the relationship between demand price and demand, which always inclines to the lower right. This is because 1, due to the diminishing marginal utility (that is, the increased utility of each commodity consumed by a person in a certain period of time), decreases with the increase of total consumption, and the currency that consumers are willing to pay for a commodity to meet the utility, that is, the demand price, is determined by the marginal utility obtained, so the demand curve is inclined to the lower right. 2. It is caused by the interaction of substitution effect and income effect: when the price of a commodity falls, it becomes relatively cheap for other commodities, so consumers will replace other commodities with this relatively cheap commodity, which is the "substitution effect". When commodity prices fall, consumers will reduce their expenses in order to achieve the same level of satisfaction, and consumers will use these increased incomes to increase their purchases of this commodity, thus further increasing their demand for this commodity. This effect is the "income effect". For normal commodities, these two effects are positive, and their interaction determines that when commodity prices fall, the demand for commodities increases, resulting in the demand curve of commodities inclining to the lower right.

The change of demand means that when the price of the commodity itself changes, the demand of the commodity changes along the established demand curve when other conditions remain unchanged. The change of demand refers to the change of consumers' income, prices of related commodities or consumers' preferences, which will lead to the parallel movement of the demand curve to the left or right when the price of the commodity itself remains unchanged.

Changes in demand will cause changes in equilibrium prices. The consequence of demand change is: 1. If other factors remain unchanged, when the income of consumers increases, the demand curve will move parallel to the right; When consumers' income decreases, the demand curve moves to the left in parallel. 2. When the price of substitutes rises, the demand curve will shift to the right, and vice versa; When the price of complementary products rises, the demand curve will move to the left, and vice versa. 3. When consumers' preference for a commodity increases, the demand curve of the commodity will shift to the right, and vice versa.

Because the demand of commodities is influenced by price and income, there is the concept of demand elasticity. The response of demand to price changes, or the extent of demand changes caused by price changes, is called price demand elasticity. Specifically, it is the value obtained by dividing the percentage of price change by the percentage of demand change when the price of a commodity changes. Because the increase and decrease of the two are always in opposite directions, the result is negative. But for the convenience of expression, the elasticity of price demand is defined as a positive value.

When the elasticity of demand is greater than 1, such goods are elastic. Lower prices, higher sales revenue, higher prices, lower sales revenue. When the elasticity of demand is equal to 1, this kind of commodity is a single elastic commodity, and the increase or decrease of price has no effect on sales revenue. When the elasticity of demand is less than 1, such goods are inelastic quotients. Price increases, sales revenue increases, price decreases and sales revenue decreases. When the elasticity of demand is equal to 0, this kind of goods is completely inelastic, and with the increase of price, the sales revenue will increase in proportion. When the elasticity of demand is positive infinity, this kind of goods is completely elastic.

Second, supply

Supply refers to the quantity of goods that producers are willing and able to provide for sale at various possible prices in a certain period of time. This kind of supply refers to effective supply, which must meet two conditions: producers have the desire to sell and the ability to supply.

The factors that affect the supply are: the price of the commodity itself (the supply increases with the increase of the price and decreases with the decrease of the price), the production cost (the supply decreases with the increase of the production cost and increases with the decrease of the production cost), the technical level of production (the supply increases with the increase of the production technical level and decreases with the decrease of the production technical level), and the prices of related products (under the condition that the price itself is unchanged, the supply increases with the increase of the price and decreases with the price).

The supply curve is a curve drawn in mathematical form by the relationship between supply price and supply quantity, which always inclines to the upper right. This is because: 1. The manufacturer's motive is to pursue profit maximization. At different price levels, the number of products that producers are willing and able to provide should be the number that can bring him the maximum profit or the minimum loss at a given price. The short-term equilibrium condition for maximizing the profit of the manufacturer is: (its) marginal revenue = marginal cost = product market price, so there is an optimal equilibrium output at each point on the short-term marginal cost curve of the manufacturer, which is also the number of products that the manufacturer is willing and able to provide, so the supply curve and the marginal cost curve overlap. 2. Due to the law of diminishing marginal revenue, with the expansion of output, marginal cost first decreases and then increases. When the product price is high, the manufacturer will be profitable and will expand the output until the marginal cost and price are equal to reach a short-term equilibrium, and the manufacturer will get the maximum profit. At this time, the corresponding output is the optimal output that the manufacturer is willing to provide; When the product price is very low, which is equal to the average variable cost and the marginal cost is equal to the price, the output is the optimal output with the least loss. At this time, the manufacturer can still make up for the variable cost by continuing production, but if it is lower, the manufacturer will stop production and will no longer be willing to supply. So the supply curve is the part where the short-term marginal curve is higher than the lowest point of the average cost curve. This part of the marginal cost curve is inclined to the upper right, so the short-term supply curve is also inclined to the upper right.

The change of supply refers to the change of commodity supply caused by the change of commodity price when other conditions remain unchanged. In mathematical graphics, this change is manifested as the movement of points on the same given supply curve. The change of supply refers to the change of commodity supply caused by the change of other factors under the condition of constant commodity price, which is manifested as the shift of supply curve position.

Changes in supply will also cause changes in equilibrium prices. The consequences of supply changes are: when the price of substitutes falls, the price of complementary products rises, the expected commodity price rises, and the technical level advances, the supply curve moves parallel to the right; If the above factors lead to a decrease in supply, the supply curve will shift to the left in parallel.

Third, market equilibrium.

Under the mutual balance of supply and demand, the market will also reach equilibrium. The equilibrium process of the market is the equilibrium price of commodities, which is the result of the interaction of two opposite forces, demand and supply.

Market equilibrium is divided into local equilibrium and general equilibrium. If only one or several commodities in the market reach the balance of supply and demand, this is a partial equilibrium. If all commodities reach a balance between supply and demand, this is a general equilibrium. It must be emphasized that the overall equilibrium is the real equilibrium, and the local equilibrium is only a temporary equilibrium.

When the market price deviates from the equilibrium price, this unbalanced state of unequal supply and demand will gradually disappear and automatically return to the equilibrium price level under the action of the market mechanism. First, when the market price is lower than the equilibrium price, the supply of goods is greater than the demand, resulting in a surplus of goods. On the one hand, it will make demanders depress prices, on the other hand, it will make suppliers reduce the supply of goods, so that commodity prices will inevitably fall to the equilibrium price level. On the contrary, when the market price is lower than the equilibrium price, the demand is greater than the supply, and there is a shortage of goods. On the one hand, it forces demanders to raise prices, on the other hand, it makes suppliers increase the supply of goods, so that the price of goods will inevitably rise until it reaches the level of equilibrium price (under the condition that other conditions remain unchanged, changes in demand will cause changes in the same direction of equilibrium price and equilibrium quantity respectively; The change of supply causes the equilibrium price to change in the opposite direction, and the equilibrium quantity changes in the same direction.