# Layer

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  Classical economic theory presents a model of supply and demand that explains the equilibrium of a single product market. The dynamics involved in reaching this equilibrium are assumed to be too complicated for the average high-school student. Economists hold the view that price determines both the supply and the demand. Equlibrium economics defines only the intersection of the supply and demand curves, not how that intersection is reached. On the other hand, system dynamicists believe that the availability of a product, rather than its rate of production, affects the market price and demand. This means that the inventory (or backlog) of a product is a major determinant in setting price and regulating demand. This model is a hybrid of both views in that it introduces the dynamic effects of inventory into a model that generally replicates the economists’ static explanation of supply and demand


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   In a real market, when the inventory is less than the desired inventory, manufacturers will raise both the supply of their product and its price. The short-term increase in supply causes manufacturing costs to rise, leading to a further increase in price. The price change in turn increases the desired rate of production. A similar effect occurs if inventory is too high. Classical economic theory has approximated this complicated process through the supply curve. The supply curve shown in Figure 2 slopes upward because each additional unit is assumed to be more difficult or expensive to make than the previous one, and therefore requires a higher price to justify its production


