GMAT Supply and Demand

By - Oct 24, 09:00 AM Comments [0]

For the GMAT Verbal section, on CR and RC, you are not expected to have specialized expertise in the topics they discuss.  Sometimes, though, it is particularly helpful to have general real world knowledge.  If you make a habit of reading regularly either a good newspaper (the New York Times, the Wall Street Journal, etc.) or the Economist magazine, then probably you will have a very good sense of the "push and pull" of real world situations.

If your GMAT is soon, and you don't have time to get up to speed with everything about the practicalities of business, economics, and politics in the real world, this is the first post in a series of five real-life areas you should be familiar with: knowing these can only help you interpret these verbal questions.

Each post will have hyperlinks to articles with more information, if you find the content new or unfamiliar.  Again, no question will automatically expect you to know any of these inside out, but insofar as you understand these, they will provide germane background,  help you interpret the question, and help you to spot unrealistic incorrect answer choices.

Here's the full list (we'll update it with links as we go!):

  • Economics: Supply and Demand
  • Economics: Labor and Wages
  • Economics: Inflation, unemployment, and interest rates
  • Law: "beyond any reasonable doubt"
  • Statistics: Statistical significance

The Law of Supply and Demand

This is a must-know idea if you are heading toward business school.  If you studied business or economics in your undergrad years, supply and demand should definitely be familiar ideas.  When a product or service is for sale in the free market, as a general rule, there are two forces determining how much it will cost.  Demand concerns how much the potential consumers want the product or service --- how willing they would be to pay a certain price for it.  High demand means: people would simply line up to buy this product, even at a high price; low demand means that the product is hard to sell, that even lowering the price does little to spur sales of the product.  Supply concerns how easy it is to bring a certain product or service to market: for a given price, how willing/able would producers be to bring this product or service to the market for sale.  High supply means: the producers easily can bring tons of it to the market. Low supply, or short supply means:  it's harder to produce the product, and producers can't make as many or as much as consumers would like to buy.

The Law of Supply and Demand says that, in a free competitive marketplace, the price will come to equilibrium at that level at which supply equals demand.  In other words, at this equilibrium price, the producers are willing to make N units, and the consumers are willing to buy N units.  The Law of Supply and Demand implies --- as a general rule, if a product or service becomes scarcer, harder to get or provide or make --- i.e. supply drops --- then usually the price will rise; and if a product or service becomes more plentiful, easier to get or provide or make --- i.e. supply rises ---- then the price will tend to fall.  For example, when world events threaten the supply of crude oil to the US, then the price of gas in the US rises.  Similarly, when demand is very high, the price typically will be high, and when demand drops, usually the price will as well.  Think of a new CD or DVD --- when it's first released, everyone wants it --- it's the new "hot" thing --- and since demand is high, the price it typically high; then wait a while --- a few months, or certainly a few years later --- inevitably interest in the item drops, and so does the price.

The Law of Supply and Demand is not a universal rule.  There are some rare example of items that do not follow the Law of Supply and Demand, for instance, a Veblan good or a Giffen good.  You do not need to know the technical details about these exceptions, but it's good to know that there are exceptions.

Summary

Knowledge of any of this is not "required" for the GMAT, but the more familiar you are with these facts, the easier it will be to place arguments in context and identify unrealistic incorrect answer choices.  Furthermore, if you want to demonstrate your competence in business school and beyond, it certainly would be a good idea to understand all of these things well.  Here are a couple CR practice questions that touch tangentially on some of these ideas.

1) http://gmat.magoosh.com/questions/1277

2) http://gmat.magoosh.com/questions/1310

This post was written by Mike McGarry, GMAT expert at Magoosh, and originally posted here.

Leave a Reply

[0] Comments to this Article