What is a widget? "Widget" is the term that has been informally adopted in microeconomics to mean "the product" -- a generic example of the thing that producers produce. This question about widgets might lead us to inquire further: what is the economy for, anyway? Is it the making of widgets? The production of stuff? Well, not exactly. After all, widget factories don't just crank out widgets, willy-nilly, regardless of whether anyone wants to buy them! And anyway, there isn't really such a thing as a widget -- a generic "product". Human desires come in such a gigantic variety that society has developed ingenious and multifarious ways of satisfying them. So that's what the economy is really for: not simply producing stuff, but satisfying human desires.
What's the difference? It's this: understanding that economic behavior is about satisfying human desires can lead us to some important insights about how to analyze and predict that behavior. There are a couple of other things that we know about how humans behave in their efforts to satisfy their desires:
Of course, not everyone desires the same things, in the same amounts. And what is toilsome exertion to one person might be a joyous dance to someone else. Those differences are what make exchange possible! People give up things they value less, in order to get things they value more. Exchanges can take the form of barter -- but that is not very efficient. To make barter work for me I have to find someone who not only wants what I have, but has what I want. It's much easier to use some neutral commodity as a medium of exchange, and a measure of value. This useful tool is called money. Things exchange for a certain amount of money: the price of things.
Now, we know pretty much all we need to know in order to start analyzing supply and demand in the widget market. Widgets are new. They're hot. They just came on the market and people are standing in lines to get them. What do you think might happen to their price?
Widget-makers, seeing their opportunity to cash in on widget-mania, hire extra crews and invest in new widgetizers to make more widgets available. Pretty soon there are no lines, and there are even widgets left sitting on store shelves. How might that affect the price of widgets?
What we're dealing with here is a very common-sensical relationship between the quantity supplied of a thing, and the quantity demanded. In time (usually a pretty short time), the interaction of producers and consumers will bring the price of a thing to an equilibrium point, at which the quantity supplied equals the quantity demanded. Because everyone involved is attempting to satisfy their desires with the least exertion, markets always tend to reach a point of equilibrium.
Obviously, not all goods are the same, and people want different things with different levels of intensity. To analyze this, economists developed the concept of elasticity. To illustrate this, let's say that our widgets were addictive: something people couldn't live without. Like tobacco, heroin or PlayStations, once people got hold of our widgets, they want more! If they felt they couldn't live without widgets, then they would buy them even if their price doubled or tripled. If a change in the price has little effect on the demand for the product, the demand for that product is said to be "inelastic". Goods tend to be demand-inelastic if there aren't many other things that buyers can substitute for them.
If, on the other hand, our product is more mundane thing, like a gadget, then an increase in the price would probably lead people to choose something else instead. Those gadgets, then, would be called demand-elastic.
The supply of things can also be elastic or inelastic. The supply of something is elastic if a small change in price will lead a relatively big change in supply. An example of such a thing would be a manufactured item -- blue jeans, let's say. Materials, plants and labor for making blue jeans can be had at the going market rate, so even if their price increased just a little, it would be profitable to supply lots more of them.
It's interesting to note that there is one element that's essential to the overall economy -- but the supply of it is not just less elastic than it might be -- it's 100% inelastic! What might that be? You're sitting on it: land. Land is, by definition, fixed in supply. No matter how much demand there is for it, no more of it can be produced. Because land is essential for production, the demand for land increases whenever overall production is increasing. And because the supply of land is completely inelastic, this can have only one result: prices for land must go up.
Economics textbooks commonly devote many chapters to advanced considerations of these concepts, using charts and graphs and equations. These analyses can lead to important, useful insights about trends in the economy and society. But they can also look like gibberish, if we forget that they are, at base, really just elaborating simple principles of human behavior. Probably the most important -- and simplest -- of these is the fundamental axiom: people seek to satisfy their desires with the least exertion.
Background Questions