The producers respond to the changing consumer tastes by discounting the smaller cars and producing more of the larger ones. Supply and demand analysis is an extremely powerful analytical tool, yet it is little understood and often confused. Each works independently of the other. We begin with demand because demand is usually easier to understand from our personal experience. We are all consumers and we all demand goods and services.
Demand is derived from consumers' tastes and and bound by their income.
Within his budget, the consumer will purchase those goods and services that he likes best. Each consumer will purchase different things because everyone likes slightly different things and incomes are different. The Law of Demand holds that other things equal, as the price of a good rises, its quantity demanded will fall, and vice versa. This is a simple, common sense statement. Think of your trips to the grocery store.