Why is it important for the average person to understand the basic mechanism of supply and demand in a market economy?

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pohnpei397 eNotes educator| Certified Educator

In some ways, it is not really that important for an average person to understand about supply and demand.  Prices alone will typically tell people what they want to know about the market economy.  However, if we have to argue that an understanding of supply and demand is important, we can say that such an understanding will allow people to make better decisions.  It can also help make them less angry in some ways.

With regard to the issue of anger, many people get very angry about things like the price of gas.  They feel that the oil companies are exploiting them and charging unfair prices.  It is possible that these people would be less upset about that (and about things like the wages that athletes make) if they understood supply and demand.  They would see that the price of gas is not high because of some nefarious actions on the part of the oil companies but rather because of the rising demand for oil all over the world.  This would make them less angry and might make them happier with their lives.

With regard to decisions, people might be able to make better decisions about buying and selling if they understood supply and demand.  For example, they might understand that they should not buy a hot new item (like a new iPad, perhaps) when it is first being sold and demand is very high.  They should realize that the price will probably go down once demand drops off.  Alternatively, they might make better choices about what profession to go into.  They might understand that it is best to go into a line of work for which there is high demand.

In these ways, it can be important for average people to understand the basics of supply and demand.