First things first: you are an economist. We all are, whether we know it or not. We all make decisions on whether to purchase things based on price, based on necessity and a whole variety of other aspects.
It might come as a shock, but really it’s a basic component of economics- everyone who acts in a market helps to create the market. So as someone who shops, who goes on holidays, in fact anyone who makes any sort of purchase of every description is a constituent in a market. This is participating in what’s known as the demand side of economics, that is you are a purchaser of goods and services, whether it is buying a packet of chewing gum, or a million pound supercar.
Supply side economics is about producing, manufacturing and supplying said products and services. That is, selling products to the marketplace. Again, all terribly enthralling.
This common balancing act of supply and demand comes together to create markets, and dictates not only the price of your chewing gum (or supercar) but every product or service you pay for. Stock markets are the classic example of this. Every day, prices of stocks go up and down due to a huge variety of reasons from financial reports, to expectation, to price fluctuation within a given sector and on.
I hope you are still following, let me reiterate, if you purchase a Cadburys chocolate bar then you help to create a value for Cadburys PLC, which in turn creates value for Cadburys’ shares in the stock market. To throw a little confusion into the mix, this will also affect the share price of other confectionary makers. If you are buying Cadburys chocolate, you AREN’T buying another brand, which in turn makes them less profitable.
Your one little purchase won’t have much of an effect in and of itself. We call this a ‘marginal’ effect. However, when millions of chocolate bars are bought and sold then trends begin to emerge, sales figures fluctuate, and a market is created. A market is not stagnant though, it is constantly moving and constantly adapting to new information.
Some information will affect whole markets. In the case of chocolate, a rise in the price of cocoa will cause a drop in the stocks of all the chocolate companies.
It’s like subconscious action, you don’t think about applying the brakes when an animal runs out in front of your car, you just do it. Markets just react, they don’t think about it. It’s a very simple explanation, but this is how markets work.