Macroeconomic Perspectives on Demand and Supply

Self-Check Questions

Describe the mechanism by which supply creates its own demand.

Hint:

In order to supply goods, suppliers must employ workers, whose incomes increase as a result of their labor. They use this additional income to demand goods of an equivalent value to those they supply.

Describe the mechanism by which demand creates its own supply.

Hint:

When consumers demand more goods than are available on the market, prices are driven higher and the additional opportunities for profit induce more suppliers to enter the market, producing an equivalent amount to that which is demanded.