serve as a remarkable social mechanism for collecting, combining, and transmitting information that is

relevant to the market—namely, the relationship between demand and supply—and then serving as

messengers to convey that information to buyers and sellers. In a market-oriented economy, no government

agency or guiding intelligence oversees the set of responses and interconnections that result from a change in

price. Instead, each consumer reacts according to that person’s preferences and budget set, and each profit-

seeking producer reacts to the impact on its expected profits. The following Clear It Up feature examines the

demand and supply models.

CLEAR IT UP

Why are demand and supply curves important?
The demand and supply model is the second fundamental diagram for this course. (The opportunity set model that

we introduced in the Choice in a World of Scarcity chapter was the first.) Just as it would be foolish to try to learn the
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