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In
microeconomics Microeconomics is a branch of mainstream economics that studies the behavior of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms. Microeconomics fo ...
, supply and demand is an economic model of
price determination Pricing is the process whereby a business sets the price at which it will sell its products and services, and may be part of the business's marketing plan. In setting prices, the business will take into account the price at which it could acqui ...
in a market. It postulates that, holding all else equal, in a
competitive market In economics, competition is a scenario where different economic firmsThis article follows the general economic convention of referring to all actors as firms; examples in include individuals and brands or divisions within the same (legal) firm ...
, the
unit price A product's average price is the result of dividing the product's total sales revenue by the total units sold. When one product is sold in variants, such as bottle sizes, managers must define "comparable" units. Average prices can be calculated b ...
for a particular good, or other traded item such as
labor Labour or labor may refer to: * Childbirth, the delivery of a baby * Labour (human activity), or work ** Manual labour, physical work ** Wage labour, a socioeconomic relationship between a worker and an employer ** Organized labour and the la ...
or
liquid A liquid is a nearly incompressible fluid that conforms to the shape of its container but retains a (nearly) constant volume independent of pressure. As such, it is one of the four fundamental states of matter (the others being solid, gas, ...
financial assets, will vary until it settles at a point where the quantity demanded (at the current price) will equal the quantity supplied (at the current price), resulting in an
economic equilibrium In economics, economic equilibrium is a situation in which economic forces such as supply and demand are balanced and in the absence of external influences the ( equilibrium) values of economic variables will not change. For example, in the st ...
for price and quantity transacted. The concept of supply and demand forms the theoretical basis of modern economics. In
macroeconomics Macroeconomics (from the Greek prefix ''makro-'' meaning "large" + ''economics'') is a branch of economics dealing with performance, structure, behavior, and decision-making of an economy as a whole. For example, using interest rates, taxes, and ...
, as well, the aggregate demand-aggregate supply model has been used to depict how the quantity of total output and the
aggregate price level The general price level is a hypothetical measure of overall prices for some set of goods and services (the consumer basket), in an economy or monetary union during a given interval (generally one day), normalized relative to some base set. T ...
may be determined in equilibrium.


Graphical representations


Supply schedule

A supply schedule, depicted graphically as a supply curve, is a table that shows the relationship between the price of a good and the quantity supplied by producers. Under the assumption of
perfect competition In economics, specifically general equilibrium theory, a perfect market, also known as an atomistic market, is defined by several idealizing conditions, collectively called perfect competition, or atomistic competition. In theoretical models whe ...
, supply is determined by
marginal cost In economics, the marginal cost is the change in the total cost that arises when the quantity produced is incremented, the cost of producing additional quantity. In some contexts, it refers to an increment of one unit of output, and in others it ...
: firms will produce additional output as long as the cost of producing an extra unit is less than the market price they receive. A rise in the cost of raw materials would decrease supply, shifting the supply curve to the left because at each possible price a smaller quantity would be supplied. One may also think of this as a shift up in the supply curve, because the price must rise for producers to supply a given quantity. A fall in production costs would increase supply, shifting the supply curve to the right and down. Mathematically, a supply curve is represented by a supply function, giving the quantity supplied as a function of its price and as many other variables as desired to better explain quantity supplied. The two most common specifications are: 1) linear supply function, e.g., the slanted line : Q(P) = 3P - 6 , and 2) the constant- elasticity supply function (also called isoelastic or log-log or loglinear supply function), e.g., the smooth curve : Q(P) = 5P^ which can be rewritten as : \log Q(P) = \log 5 + 0.5 \log P By its very nature, the concept of a supply curve assumes that firms are ''perfect competitors'', having no influence over the market price. This is because each point on the supply curve answers the question, "If this firm is ''faced with'' this potential price, how much output will it sell?" If a firm has market power—in violation of the ''perfect competitor'' model—its decision on how much output to bring to market influences the market price. Thus the firm is not "faced with" any given price, and a more complicated model, e.g., a
monopoly A monopoly (from Greek language, Greek el, μόνος, mónos, single, alone, label=none and el, πωλεῖν, pōleîn, to sell, label=none), as described by Irving Fisher, is a market with the "absence of competition", creating a situati ...
or
oligopoly An oligopoly (from Greek ὀλίγος, ''oligos'' "few" and πωλεῖν, ''polein'' "to sell") is a market structure in which a market or industry is dominated by a small number of large sellers or producers. Oligopolies often result f ...
or differentiated-product model, should be used. Economists distinguish between the supply curve of an individual firm and the market supply curve. The market supply curve shows the total quantity supplied by all firms, so it is the sum of the quantities supplied by all suppliers at each potential price (that is, the individual firms' supply curves are added horizontally). Economists distinguish between short-run and long-run supply curve. ''Short run'' refers to a time period during which one or more inputs are fixed (typically
physical capital Physical capital represents in economics one of the three primary factors of production. Physical capital is the apparatus used to produce a good and services. Physical capital represents the tangible man-made goods that help and support the pro ...
), and the number of firms in the industry is also fixed (if it is a market supply curve). ''Long run'' refers to a time period during which new firms enter or existing firms exit and all inputs can be adjusted fully to any price change. Long-run supply curves are flatter than short-run counterparts (with quantity more sensitive to price, more elastic supply). Common determinants of supply are: # Prices of inputs, including wages # The technology used,
Productivity Productivity is the efficiency of production of goods or services expressed by some measure. Measurements of productivity are often expressed as a ratio of an aggregate output to a single input or an aggregate input used in a production proces ...
# Firms' expectations about future prices # Number of suppliers (for a market supply curve)


Demand schedule

A demand schedule, depicted graphically as a
demand curve In economics, a demand curve is a graph depicting the relationship between the price of a certain commodity (the ''y''-axis) and the quantity of that commodity that is demanded at that price (the ''x''-axis). Demand curves can be used either for ...
, represents the amount of a certain good that buyers are willing and able to purchase at various prices, assuming all other determinants of demand are held constant, such as income, tastes and preferences, and the prices of substitute and
complementary good In economics, a complementary good is a good whose appeal increases with the popularity of its complement. Technically, it displays a negative cross elasticity of demand and that demand for it increases when the price of another good decreases. ...
s. According to the
law of demand In microeconomics, the law of demand is a fundamental principle which states that there is an inverse relationship between price and quantity demanded. In other words, "conditional on all else being equal, as the price of a good increases (↑), ...
, the demand curve is always downward-sloping, meaning that as the price decreases, consumers will buy more of the good. Mathematically, a demand curve is represented by a demand function, giving the quantity demanded as a function of its price and as many other variables as desired to better explain quantity demanded. The two most common specifications are linear demand, e.g., the slanted line : Q(P) = 32 - 2P and the constant- elasticity demand function (also called isoelastic or log-log or loglinear demand function), e.g., the smooth curve : Q(P) = 3P^ which can be rewritten as : \log Q(P) = \log 3 - 2 \log P Note that really a demand curve should be drawn with price on the horizontal ''x''-axis, since it is the independent variable. Instead, price is put on the vertical, ''f(x)'' ''y''-axis as a matter of unfortunate historical convention. Just as the supply curve parallels the
marginal cost In economics, the marginal cost is the change in the total cost that arises when the quantity produced is incremented, the cost of producing additional quantity. In some contexts, it refers to an increment of one unit of output, and in others it ...
curve, the demand curve parallels
marginal utility In economics, utility is the satisfaction or benefit derived by consuming a product. The marginal utility of a good or service describes how much pleasure or satisfaction is gained by consumers as a result of the increase or decrease in consump ...
, measured in dollars. Consumers will be willing to buy a given quantity of a good, at a given price, if the marginal utility of additional consumption is equal to the
opportunity cost In microeconomic theory, the opportunity cost of a particular activity is the value or benefit given up by engaging in that activity, relative to engaging in an alternative activity. More effective it means if you chose one activity (for example ...
determined by the price, that is, the marginal utility of alternative consumption choices. The demand schedule is defined as the ''willingness'' and ''ability'' of a consumer to purchase a given product at a certain time. The demand curve is generally downward-sloping, but for some goods it is upward-sloping. Two such types of goods have been given definitions and names that are in common use: Veblen goods, goods which because of fashion or signalling are more attractive at higher prices, and Giffen goods, which, by virtue of being inferior goods that absorb a large part of a consumer's income (e.g., staples such as the classic example of potatoes in Ireland), may see an increase in quantity demanded when the price rises. The reason the law of demand is violated for Giffen goods is that the rise in the price of the good has a strong income effect, sharply reducing the purchasing power of the consumer so that he switches away from luxury goods to the Giffen good, e.g., when the price of potatoes rises, the Irish peasant can no longer afford meat and eats more potatoes to cover for the lost calories. As with the supply curve, by its very nature the concept of a demand curve requires that the purchaser be a perfect competitor—that is, that the purchaser have no influence over the market price. This is true because each point on the demand curve answers the question, "If buyers are ''faced with'' this potential price, how much of the product will they purchase?" But, if a buyer has market power (that is, the amount he buys influences the price), he is not "faced with" any given price, and we must use a more complicated model, of
monopsony In economics, a monopsony is a market structure in which a single buyer substantially controls the market as the major purchaser of goods and services offered by many would-be sellers. The microeconomic theory of monopsony assumes a single entity ...
. As with supply curves, economists distinguish between the demand curve for an individual and the demand curve for a market. The market demand curve is obtained by adding the quantities from the individual demand curves at each price. Common determinants of demand are: # Income # Tastes and preferences # Prices of related goods and services # Consumers' expectations about future prices and incomes # Number of potential consumers # Advertising


History of the curves

Since supply and demand can be considered as functions of price they have a natural graphical representation. Demand curves were first drawn by
Augustin Cournot Antoine Augustin Cournot (; 28 August 180131 March 1877) was a French philosopher and mathematician who also contributed to the development of economics. Biography Antoine Augustin Cournot was born at Gray, Haute-Saône. In 1821 he entered o ...
in his ''Recherches sur les Principes Mathématiques de la Théorie des Richesses'' (1838) – see
Cournot competition Cournot competition is an economic model used to describe an industry structure in which companies compete on the amount of output they will produce, which they decide on independently of each other and at the same time. It is named after Antoine A ...
. Supply curves were added by Fleeming Jenkin in ''The Graphical Representation of the Laws of Supply and Demand...'' of 1870. Both sorts of curve were popularised by
Alfred Marshall Alfred Marshall (26 July 1842 – 13 July 1924) was an English economist, and was one of the most influential economists of his time. His book '' Principles of Economics'' (1890) was the dominant economic textbook in England for many years. I ...
who, in his '' Principles of Economics'' (1890), chose to represent price – normally the independent variable – by the vertical axis; a practice which remains common. If supply or demand is a function of other variables besides price, it may be represented by a family of curves (with a change in the other variables constituting a shift between curves) or by a surface in a higher dimensional space.


Microeconomics


Equilibrium

Generally speaking, an equilibrium is defined to be the price-quantity pair where the quantity demanded is equal to the quantity supplied. It is represented by the intersection of the demand and supply curves. The analysis of various equilibria is a fundamental aspect of
microeconomics Microeconomics is a branch of mainstream economics that studies the behavior of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms. Microeconomics fo ...
: Market equilibrium: A situation in a market when the price is such that the quantity demanded by consumers is correctly balanced by the quantity that firms wish to supply. In this situation, the market clears. Changes in market equilibrium: Practical uses of supply and demand analysis often center on the different variables that change equilibrium price and quantity, represented as shifts in the respective curves. Comparative statics of such a shift traces the effects from the initial equilibrium to the new equilibrium. Demand curve shifts: When consumers increase the quantity demanded ''at a given price'', it is referred to as an ''increase in demand''. Increased demand can be represented on the graph as the curve being shifted to the right. At each price point, a greater quantity is demanded, as from the initial curve to the new curve . In the diagram, this raises the equilibrium price from to the higher . This raises the equilibrium quantity from to the higher . (A movement along the curve is described as a "change in the quantity demanded" to distinguish it from a "change in demand," that is, a shift of the curve.) The ''increase'' in demand has caused an increase in (equilibrium) quantity. The increase in demand could come from changing tastes and fashions, incomes, price changes in complementary and substitute goods, market expectations, and number of buyers. This would cause the entire demand curve to shift changing the equilibrium price and quantity. Note in the diagram that the shift of the demand curve, by causing a new equilibrium price to emerge, resulted in ''movement along'' the supply curve from the point to the point . If the ''demand decreases'', then the opposite happens: a shift of the curve to the left. If the demand starts at , and ''decreases'' to , the equilibrium price will decrease, and the equilibrium quantity will also decrease. The quantity supplied at each price is the same as before the demand shift, reflecting the fact that the supply curve has not shifted; but the equilibrium quantity and price are different as a result of the change (shift) in demand. Supply curve shifts: When technological progress occurs, the supply curve shifts. For example, assume that someone invents a better way of growing wheat so that the cost of growing a given quantity of wheat decreases. Otherwise stated, producers will be willing to supply more wheat at every price and this shifts the supply curve outward, to —an ''increase in supply''. This increase in supply causes the equilibrium price to decrease from to . The equilibrium quantity increases from to as consumers move along the demand curve to the new lower price. As a result of a supply curve shift, the price and the quantity move in opposite directions. If the quantity supplied ''decreases'', the opposite happens. If the supply curve starts at , and shifts leftward to , the equilibrium price will increase and the equilibrium quantity will decrease as consumers move along the demand curve to the new higher price and associated lower quantity demanded. The quantity demanded at each price is the same as before the supply shift, reflecting the fact that the demand curve has not shifted. But due to the change (shift) in supply, the equilibrium quantity and price have changed. The movement of the supply curve in response to a change in a non-price determinant of supply is caused by a change in the y-intercept, the constant term of the supply equation. The supply curve shifts up and down the y axis as non-price determinants of demand change.


Partial equilibrium

Partial equilibrium, as the name suggests, takes into consideration only a part of the market to attain equilibrium. Jain proposes (attributed to
George Stigler George Joseph Stigler (; January 17, 1911 – December 1, 1991) was an American economist. He was the 1982 laureate in Nobel Memorial Prize in Economic Sciences and is considered a key leader of the Chicago school of economics. Early life and e ...
): "A partial equilibrium is one which is based on only a restricted range of data, a standard example is price of a single product, the prices of all other products being held fixed during the analysis." The supply-and-demand model is a partial equilibrium model of
economic equilibrium In economics, economic equilibrium is a situation in which economic forces such as supply and demand are balanced and in the absence of external influences the ( equilibrium) values of economic variables will not change. For example, in the st ...
, where the clearance on the market of some specific
goods In economics, goods are items that satisfy human wants and provide utility, for example, to a consumer making a purchase of a satisfying product. A common distinction is made between goods which are transferable, and services, which are not ...
is obtained independently from prices and quantities in other markets. In other words, the prices of all substitutes and complements, as well as
income Income is the consumption and saving opportunity gained by an entity within a specified timeframe, which is generally expressed in monetary terms. Income is difficult to define conceptually and the definition may be different across fields. Fo ...
levels of
consumer A consumer is a person or a group who intends to order, or uses purchased goods, products, or services primarily for personal, social, family, household and similar needs, who is not directly related to entrepreneurial or business activities. ...
s are constant. This makes analysis much simpler than in a
general equilibrium In economics, general equilibrium theory attempts to explain the behavior of supply, demand, and prices in a whole economy with several or many interacting markets, by seeking to prove that the interaction of demand and supply will result in an o ...
model which includes an entire economy. Here the dynamic process is that prices adjust until supply equals demand. It is a powerfully simple technique that allows one to study equilibrium,
efficiency Efficiency is the often measurable ability to avoid wasting materials, energy, efforts, money, and time in doing something or in producing a desired result. In a more general sense, it is the ability to do things well, successfully, and without ...
and comparative statics. The stringency of the simplifying assumptions inherent in this approach makes the model considerably more tractable, but may produce results which, while seemingly precise, do not effectively model real world economic phenomena. Partial equilibrium analysis examines the effects of policy action in creating equilibrium only in that particular sector or market which is directly affected, ignoring its effect in any other market or industry assuming that they being small will have little impact if any. Hence this analysis is considered to be useful in constricted markets.
Léon Walras Marie-Esprit-Léon Walras (; 16 December 1834 – 5 January 1910) was a French mathematical economist and Georgist. He formulated the marginal theory of value (independently of William Stanley Jevons and Carl Menger) and pioneered the developme ...
first formalized the idea of a one-period economic equilibrium of the general economic system, but it was French economist
Antoine Augustin Cournot Antoine Augustin Cournot (; 28 August 180131 March 1877) was a French philosopher and mathematician who also contributed to the development of economics. Biography Antoine Augustin Cournot was born at Gray, Haute-Saône. In 1821 he entere ...
and English political economist
Alfred Marshall Alfred Marshall (26 July 1842 – 13 July 1924) was an English economist, and was one of the most influential economists of his time. His book '' Principles of Economics'' (1890) was the dominant economic textbook in England for many years. I ...
who developed tractable models to analyze an economic system.


Other markets

The model of supply and demand also applies to various specialty markets. The model is commonly applied to
wage A wage is payment made by an employer to an employee for work done in a specific period of time. Some examples of wage payments include compensatory payments such as ''minimum wage'', '' prevailing wage'', and ''yearly bonuses,'' and remune ...
s, in the market for
labor Labour or labor may refer to: * Childbirth, the delivery of a baby * Labour (human activity), or work ** Manual labour, physical work ** Wage labour, a socioeconomic relationship between a worker and an employer ** Organized labour and the la ...
. The typical roles of supplier and demander are reversed. The suppliers are individuals, who try to sell their labor for the highest price. The demanders of labor are businesses, which try to buy the type of labor they need at the lowest price. The equilibrium price for a certain type of labor is the wage rate. However, economist Steve Fleetwood revisited the empirical reality of supply and demand curves in labor markets and concluded that the evidence is "at best inconclusive and at worst casts doubt on their existence." For instance, he cites Kaufman and Hotchkiss (2006): "For adult men, nearly all studies find the labour supply curve to be negatively sloped or backward bending." In both classical and
Keynesian Keynesian economics ( ; sometimes Keynesianism, named after British economist John Maynard Keynes) are the various macroeconomic theories and models of how aggregate demand (total spending in the economy) strongly influences economic output an ...
economics, the money market is analyzed as a supply-and-demand system with
interest rates An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, th ...
being the price. The
money supply In macroeconomics, the money supply (or money stock) refers to the total volume of currency held by the public at a particular point in time. There are several ways to define "money", but standard measures usually include currency in circu ...
may be a vertical supply curve, if the
central bank A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union, and oversees their commercial banking system. In contrast to a commercial bank, a centra ...
of a country chooses to use
monetary policy Monetary policy is the policy adopted by the monetary authority of a nation to control either the interest rate payable for federal funds, very short-term borrowing (borrowing by banks from each other to meet their short-term needs) or the money s ...
to fix its value regardless of the interest rate; in this case the money supply is totally inelastic. On the other hand, the money supply curve is a horizontal line if the central bank is targeting a fixed interest rate and ignoring the value of the money supply; in this case the money supply curve is perfectly elastic. The demand for money intersects with the money supply to determine the interest rate. According to some studies, the laws of supply and demand are applicable not only to the business relationships of people, but to the behaviour of social animals and to all living things that interact on the biological markets in scarce resource environments. The model of supply and demand accurately describes the characteristic of metabolic systems: specifically, it explains how
feedback inhibition An enzyme inhibitor is a molecule that binds to an enzyme and blocks its activity. Enzymes are proteins that speed up chemical reactions necessary for life, in which substrate molecules are converted into products. An enzyme facilitates a s ...
allows metabolic pathways to respond to the demand for a metabolic intermediates while minimizing effects due to variation in the supply.


Empirical estimation

Demand and supply relations in a market can be statistically estimated from price, quantity, and other
data In the pursuit of knowledge, data (; ) is a collection of discrete values that convey information, describing quantity, quality, fact, statistics, other basic units of meaning, or simply sequences of symbols that may be further interpret ...
with sufficient information in the model. This can be done with '' simultaneous-equation methods of estimation'' in
econometrics Econometrics is the application of statistical methods to economic data in order to give empirical content to economic relationships. M. Hashem Pesaran (1987). "Econometrics," '' The New Palgrave: A Dictionary of Economics'', v. 2, p. 8 p. ...
. Such methods allow solving for the model-relevant "structural coefficients," the estimated algebraic counterparts of the theory. The '' Parameter identification problem'' is a common issue in "structural estimation." Typically, data on
exogenous In a variety of contexts, exogeny or exogeneity () is the fact of an action or object originating externally. It contrasts with endogeneity or endogeny, the fact of being influenced within a system. Economics In an economic model, an exogen ...
variables (that is, variables other than price and quantity, both of which are
endogenous Endogenous substances and processes are those that originate from within a living system such as an organism, tissue, or cell. In contrast, exogenous substances and processes are those that originate from outside of an organism. For example, ...
variables) are needed to perform such an estimation. An alternative to "structural estimation" is reduced-form estimation, which regresses each of the endogenous variables on the respective exogenous variables.


Macroeconomic uses

Demand and supply have also been generalized to explain
macroeconomic Macroeconomics (from the Greek prefix ''makro-'' meaning "large" + ''economics'') is a branch of economics dealing with performance, structure, behavior, and decision-making of an economy as a whole. For example, using interest rates, taxes, an ...
variables in a
market economy A market economy is an economic system in which the decisions regarding investment, production and distribution to the consumers are guided by the price signals created by the forces of supply and demand, where all suppliers and consumers ...
, including the quantity of total output and the
aggregate price level The general price level is a hypothetical measure of overall prices for some set of goods and services (the consumer basket), in an economy or monetary union during a given interval (generally one day), normalized relative to some base set. T ...
. The aggregate demand-aggregate supply model may be the most direct application of supply and demand to macroeconomics, but other macroeconomic models also use supply and demand. Compared to
microeconomic Microeconomics is a branch of mainstream economics that studies the behavior of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms. Microeconomics fo ...
uses of demand and supply, different (and more controversial) theoretical considerations apply to such
macroeconomic Macroeconomics (from the Greek prefix ''makro-'' meaning "large" + ''economics'') is a branch of economics dealing with performance, structure, behavior, and decision-making of an economy as a whole. For example, using interest rates, taxes, an ...
counterparts as
aggregate demand In macroeconomics, aggregate demand (AD) or domestic final demand (DFD) is the total demand for final goods and services in an economy at a given time. It is often called effective demand, though at other times this term is distinguished. This is ...
and
aggregate supply In economics, aggregate supply (AS) or domestic final supply (DFS) is the total supply of goods and services that firms in a national economy plan on selling during a specific time period. It is the total amount of goods and services that fir ...
. Demand and supply are also used in macroeconomic theory to relate
money supply In macroeconomics, the money supply (or money stock) refers to the total volume of currency held by the public at a particular point in time. There are several ways to define "money", but standard measures usually include currency in circu ...
and money demand to
interest rate An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, t ...
s, and to relate labor supply and labor demand to wage rates.


History

The 256th couplet of
Tirukkural The ''Tirukkuṟaḷ'' ( ta, திருக்குறள், lit=sacred verses), or shortly the ''Kural'' ( ta, குறள்), is a classic Tamil language text consisting of 1,330 short couplets, or kurals, of seven words each. The tex ...
, which was composed at least 2000 years ago, says that "if people do not consume a product or service, then there will not be anybody to supply that product or service for the sake of price". According to Hamid S. Hosseini, the power of supply and demand was understood to some extent by several early Muslim scholars, such as fourteenth-century Syrian scholar
Ibn Taymiyyah Ibn Taymiyyah (January 22, 1263 – September 26, 1328; ar, ابن تيمية), birth name Taqī ad-Dīn ʾAḥmad ibn ʿAbd al-Ḥalīm ibn ʿAbd al-Salām al-Numayrī al-Ḥarrānī ( ar, تقي الدين أحمد بن عبد الحليم � ...
, who wrote: "If desire for goods increases while its availability decreases, its price rises. On the other hand, if availability of the good increases and the desire for it decreases, the price comes down." (citing Hamid S. Hosseini, 1995. "Understanding the Market Mechanism Before Adam Smith: Economic Thought in Medieval Islam," ''History of Political Economy'', Vol. 27, No. 3, 539–61). Shifting focus to the English etymology of the expression, it has been confirmed that the phrase 'supply and demand' was not used by English economics writers until after the end of the 17th century. In
John Locke John Locke (; 29 August 1632 – 28 October 1704) was an English philosopher and physician, widely regarded as one of the most influential of Enlightenment thinkers and commonly known as the "father of liberalism". Considered one of ...
's 1691 work ''Some Considerations on the Consequences of the Lowering of Interest and the Raising of the Value of Money'', Locke alluded to the idea of supply and demand, however, he failed to accurately label it as such and thus, he fell short in coining the phrase and conveying its true significance.Groenewegen P. (2008) ‘Supply and Demand’. In: Palgrave Macmillan (eds) The New Palgrave Dictionary of Economics. Palgrave Macmillan, London Locke wrote: “The price of any commodity rises or falls by the proportion of the number of buyer and sellers” and “that which regulates the price...
f goods F, or f, is the sixth letter in the Latin alphabet, used in the modern English alphabet, the alphabets of other western European languages and others worldwide. Its name in English is ''ef'' (pronounced ), and the plural is ''efs''. Hist ...
is nothing else but their quantity in proportion to heVent.” Locke's terminology drew criticism from John Law. Law argued that,"The Prices of Goods are not according to the quantity in proportion to the Vent, but in proportion to the Demand." From Law the demand part of the phrase was given its proper title and it began to circulate among "prominent authorities" in the 1730s. In 1755, Francis Hutcheson, in his ''A System of Moral Philosophy'', furthered development toward the phrase by stipulating that, "the prices of goods depend on these two jointly, the Demand... and the Difficulty of acquiring." It was not until 1767 that the phrase "supply and demand" was first used by Scottish writer
James Denham-Steuart Sir James Steuart, 3rd Baronet of Goodtrees and 7th Baronet of Coltness (; 21 October 1712 – 26 November 1780), also known as Sir James Steuart Denham and Sir James Denham Steuart, was a prominent Scottish Jacobite and author of "probably ...
in his ''Inquiry into the Principles of Political Economy.'' He originated the use of this phrase by effectively combining "supply" and "demand" together in a number of different occasions such as
price determination Pricing is the process whereby a business sets the price at which it will sell its products and services, and may be part of the business's marketing plan. In setting prices, the business will take into account the price at which it could acqui ...
and competitive analysis. In Steuart's chapter entitled "Of Demand", he argues that "The nature of Demand is to encourage industry; and when it is regularly made, the effect of it is, that the supply for the most part is found to be in proportion to it, and then the demand is simple". It is presumably from this chapter that the idea spread to other authors and economic thinkers.
Adam Smith Adam Smith (baptized 1723 – 17 July 1790) was a Scottish economist and philosopher who was a pioneer in the thinking of political economy and key figure during the Scottish Enlightenment. Seen by some as "The Father of Economics"——� ...
used the phrase after Steuart in his 1776 book ''
The Wealth of Nations ''An Inquiry into the Nature and Causes of the Wealth of Nations'', generally referred to by its shortened title ''The Wealth of Nations'', is the '' magnum opus'' of the Scottish economist and moral philosopher Adam Smith. First published in ...
''. In ''The Wealth of Nations'', Smith asserted that the supply price was fixed but that its "merit" (value) would decrease as its "scarcity" increased, this idea by Smith was later named the law of demand. In 1803, Thomas Robert Malthus used the phrase "supply and demand" twenty times in the second edition of the ''Essay on Population''. And
David Ricardo David Ricardo (18 April 1772 – 11 September 1823) was a British political economist. He was one of the most influential of the classical economists along with Thomas Malthus, Adam Smith and James Mill. Ricardo was also a politician, and a ...
in his 1817 work, ''
Principles of Political Economy and Taxation '' the Principles of Political Economy and Taxation'' (19 April 1817) is a book by David Ricardo on economics. The book concludes that land rent grows as population increases. It also presents the theory of comparative advantage, the theory tha ...
'', titled one chapter, "On the Influence of Demand and Supply on Price". In ''Principles of Political Economy and Taxation'', Ricardo more rigorously laid down the idea of the assumptions that were used to build his ideas of supply and demand. In 1838,
Antoine Augustin Cournot Antoine Augustin Cournot (; 28 August 180131 March 1877) was a French philosopher and mathematician who also contributed to the development of economics. Biography Antoine Augustin Cournot was born at Gray, Haute-Saône. In 1821 he entere ...
developed a mathematical model of supply and demand in his ''Researches into the Mathematical Principles of Wealth'', it included diagrams. It is important to note that the use of the phrase was still rare and only a few examples of more than 20 uses in a single work have been identified by the end of the second decade of the 19th century. During the late 19th century the marginalist school of thought emerged. The main innovators of this approach were Stanley Jevons,
Carl Menger Carl Menger von Wolfensgrün (; ; 28 February 1840 – 26 February 1921) was an Austrian economist and the founder of the Austrian School of economics. Menger contributed to the development of the theories of marginalism and marginal utility ...
, and
Léon Walras Marie-Esprit-Léon Walras (; 16 December 1834 – 5 January 1910) was a French mathematical economist and Georgist. He formulated the marginal theory of value (independently of William Stanley Jevons and Carl Menger) and pioneered the developme ...
. The key idea was that the price was set by the subjective value of a good at the margin. This was a substantial change from Adam Smith's thoughts on determining the supply price. In his 1870 essay "On the Graphical Representation of Supply and Demand", Fleeming Jenkin in the course of "introduc ngthe diagrammatic method into the English economic literature" published the first drawing of supply and demand curves in English, including comparative statics from a shift of supply or demand and application to the labor market. The model was further developed and popularized by
Alfred Marshall Alfred Marshall (26 July 1842 – 13 July 1924) was an English economist, and was one of the most influential economists of his time. His book '' Principles of Economics'' (1890) was the dominant economic textbook in England for many years. I ...
in the 1890 textbook '' Principles of Economics''.


Criticism

The philosopher
Hans Albert Hans Albert (born 8 February 1921) is a German philosopher. Born in Cologne, he lives in Heidelberg. His fields of research are Social Sciences and General Studies of Methods. He is a critical rationalist, paying special attention to rational ...
has argued that the
ceteris paribus ' (also spelled '; () is a Latin phrase, meaning "other things equal"; some other English translations of the phrase are "all other things being equal", "other things held constant", "all else unchanged", and "all else being equal". A statement ...
conditions of the marginalist theory rendered the theory itself an empty tautology and completely closed to experimental testing. In essence, he argues, the supply and demand curves (theoretical functions which express the quantity of a product which would be offered or requested for a given price) are purely ontological.
Piero Sraffa Piero Sraffa (5 August 1898 – 3 September 1983) was an influential Italian economist who served as lecturer of economics at the University of Cambridge. His book ''Production of Commodities by Means of Commodities'' is taken as founding the n ...
's critique focused on the inconsistency (except in implausible circumstances) of partial equilibrium analysis and the rationale for the upward slope of the supply curve in a market for a produced consumption good. The notability of Sraffa's critique is also demonstrated by
Paul Samuelson Paul Anthony Samuelson (May 15, 1915 – December 13, 2009) was an American economist who was the first American to win the Nobel Memorial Prize in Economic Sciences. When awarding the prize in 1970, the Swedish Royal Academies stated that he " ...
's comments and engagements with it over many years, for example: :What a cleaned-up version of Sraffa (1926) establishes is how ''nearly empty'' are ''all'' of Marshall's partial equilibrium boxes. To a logical purist of Wittgenstein and Sraffa class, the ''Marshallian partial'' equilibrium box of ''constant'' cost is even more empty than the box of ''increasing'' cost. Modern Post-Keynesians criticize the supply and demand model for failing to explain the prevalence of administered prices, in which retail prices are set by firms, primarily based on a mark-up over normal average unit costs, and aren't responsive to changes in demand up to capacity. Some economists criticize the conventional supply and demand theory for failing to explain or anticipate asset bubbles that can arise from a positive feedback loop. Conventional supply and demand theory assumes that expectations of consumers do not change as a consequence of price changes. In scenarios such as the
United States housing bubble The 2000s United States housing bubble was a real-estate bubble affecting over half of the U.S. states. It was the impetus for the subprime mortgage crisis. Housing prices peaked in early 2006, started to decline in 2006 and 2007, and reac ...
, an initial price change of an asset can increase the expectations of investors, making the asset more lucrative and contributing to further price increases until market sentiment changes, which creates a positive feedback loop and an asset bubble. Asset bubbles cannot be understood in the conventional supply and demand framework because the conventional system assumes a price change will be self-correcting and the system will snap back to equilibrium. Paul Cockshott's critique focuses on the
unfalsifiability Falsifiability is a standard of evaluation of scientific theories and hypotheses that was introduced by the philosopher of science Karl Popper in his book '' The Logic of Scientific Discovery'' (1934). He proposed it as the cornerstone of a so ...
of the neoclassical model. In the linear examples given above we have four unknowns: the slope and intercept of both the supply curve and the demand curve. But because we only have two knowns, price and quantity, any set of supply and demand curves that crosses the point (Q,P) could explain the data. Hence unfalsifiability. Cockshott also points out that prices are negatively correlated with quantity due to
economies of scale In microeconomics, economies of scale are the cost advantages that enterprises obtain due to their scale of operation, and are typically measured by the amount of output produced per unit of time. A decrease in cost per unit of output enables ...
, not positively correlated as the theory suggests. Finally, Cockshott argues that the theory is needlessly complicated when compared to the
labour theory of value The labor theory of value (LTV) is a theory of value that argues that the economic value of a good or service is determined by the total amount of " socially necessary labor" required to produce it. The LTV is usually associated with Marxian ...
, and that having to introduce a notion of the curves shifting amounts to adding epicycles.Paul Cockshott: ''How the World Works: The Story of Human Labor from Prehistory to the Modern Day.'' Monthly Review Press, 2020, . pp. 65-68


See also

*
Capacity utilization Capacity utilization or capacity utilisation is the extent to which a firm or nation employs its installed productive capacity. It is the relationship between output that ''is'' produced with the installed equipment, and the potential output whic ...
*
Consumer theory The theory of consumer choice is the branch of microeconomics that relates preferences to consumption expenditures and to consumer demand curves. It analyzes how consumers maximize the desirability of their consumption as measured by their pref ...
* Deadweight loss *
Economic surplus In mainstream economics, economic surplus, also known as total welfare or total social welfare or Marshallian surplus (after Alfred Marshall), is either of two related quantities: * Consumer surplus, or consumers' surplus, is the monetary gain ...
*
Effective demand In economics, effective demand (ED) in a market is the demand for a product or service which occurs when purchasers are constrained in a different market. It contrasts with notional demand, which is the demand that occurs when purchasers are not ...
* Effect of taxes and subsidies on price * Elasticity *
Excess demand function In microeconomics, excess demand is a phenomenon where the demand for goods and services exceeds that which the firms can produce. In microeconomics, an excess demand function is a function expressing excess demand for a product—the excess ...
*
Externality In economics, an externality or external cost is an indirect cost or benefit to an uninvolved third party that arises as an effect of another party's (or parties') activity. Externalities can be considered as unpriced goods involved in either co ...
*
Guanzi (text) The ''Guanzi'' () is an ancient Chinese political and philosophical text. At over 135,000 characters long, the ''Guanzi'' is one of the longest early Chinese philosophical texts. This anonymously written foundational text covers broad subject m ...
*
History of economic thought History (derived ) is the systematic study and the documentation of the human activity. The time period of event before the invention of writing systems is considered prehistory. "History" is an umbrella term comprising past events as well ...
*
Inverse demand function In economics, an inverse demand function is the inverse function of a demand function. The inverse demand function views price as a function of quantity. Quantity demanded, ''Q'', is a function f (the demand function) of price; the inverse demand ...
* Law of supply *
Neoclassical economics Neoclassical economics is an approach to economics in which the production, consumption and valuation (pricing) of goods and services are observed as driven by the supply and demand model. According to this line of thought, the value of a good ...
* Price discovery *
Rationing Rationing is the controlled distribution of scarce resources, goods, services, or an artificial restriction of demand. Rationing controls the size of the ration, which is one's allowed portion of the resources being distributed on a particular ...
*
Social cost Social cost in neoclassical economics is the sum of the private costs resulting from a transaction and the costs imposed on the consumers as a consequence of being exposed to the transaction for which they are not compensated or charged. In other w ...
*
Supply chain In commerce, a supply chain is a network of facilities that procure raw materials, transform them into intermediate goods and then final products to customers through a distribution system. It refers to the network of organizations, people, activ ...
* Supply shock * Yield management


References


Further reading

* '' Foundations of Economic Analysis'' by Paul A. Samuelson * ''Price Theory and Applications'' by Steven E. Landsburg * ''
An Inquiry into the Nature and Causes of the Wealth of Nations ''An Inquiry into the Nature and Causes of the Wealth of Nations'', generally referred to by its shortened title ''The Wealth of Nations'', is the '' magnum opus'' of the Scottish economist and moral philosopher Adam Smith. First published in ...
'',
Adam Smith Adam Smith (baptized 1723 – 17 July 1790) was a Scottish economist and philosopher who was a pioneer in the thinking of political economy and key figure during the Scottish Enlightenment. Seen by some as "The Father of Economics"——� ...
, 177


Supply and Demand
book by Hubert Douglas Henderson, Hubert D. Henderson at Project Gutenberg.


External links


Nobel Prize Winner Prof. William Vickrey: 15 fatal fallacies of financial fundamentalism – A Disquisition on Demand Side Economics
(
William Vickrey William Spencer Vickrey (21 June 1914 – 11 October 1996) was a Canadian-American professor of economics and Nobel Laureate. Vickrey was awarded the 1996 Nobel Memorial Prize in Economic Sciences with James Mirrlees for their research into the e ...
)
Marshallian Cross Diagrams and Their Uses before Alfred Marshall: The Origins of Supply and Demand Geometry
by Thomas M. Humphrey *
By what is the price of a commodity determined?
', a brief statement of
Karl Marx Karl Heinrich Marx (; 5 May 1818 – 14 March 1883) was a German philosopher, economist, historian, sociologist, political theorist, journalist, critic of political economy, and socialist revolutionary. His best-known titles are the 1848 ...
's rival account
Supply and Demand
by Fiona Maclachlan an
Basic Supply and Demand
by Mark Gillis, Wolfram Demonstrations Project. {{DEFAULTSORT:Supply And Demand Economics laws Economics curves Market (economics) Demand