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In microeconomics, 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) fir ...
, the unit price for a particular
good In most contexts, the concept of good denotes the conduct that should be preferred when posed with a choice between possible actions. Good is generally considered to be the opposite of evil and is of interest in the study of ethics, morality, ph ...
, 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 labour ...
or liquid 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 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, an ...
, 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, supply is determined by marginal cost: 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 or oligopoly 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), 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 # 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 In most contexts, the concept of good denotes the conduct that should be preferred when posed with a choice between possible actions. Good is generally considered to be the opposite of evil and is of interest in the study of ethics, morality, ph ...
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 curve, the demand curve parallels marginal utility, 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 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 good A Veblen good is a type of luxury good for which the demand increases as the price increases, in apparent (but not actual) contradiction of the law of demand, resulting in an upward-sloping demand curve. The higher prices of Veblen goods may mak ...
s, goods which because of fashion or
signalling In signal processing, a signal is a function that conveys information about a phenomenon. Any quantity that can vary over space or time can be used as a signal to share messages between observers. The ''IEEE Transactions on Signal Processing'' ...
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 in his ''Recherches sur les Principes Mathématiques de la Théorie des Richesses'' (1838) – see Cournot competition. Supply curves were added by
Fleeming Jenkin Henry Charles Fleeming Jenkin FRS FRSE LLD (; 25 March 1833 – 12 June 1885) was Regius Professor of Engineering at the University of Edinburgh, remarkable for his versatility. Known to the world as the inventor of the cable car or telphera ...
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: 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 In economics, comparative statics is the comparison of two different economic outcomes, before and after a change in some underlying exogenous parameter. As a type of ''static analysis'' it compares two different equilibrium states, after the ...
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, where the clearance on the market of some specific goods is obtained independently from prices and quantities in other markets. In other words, the prices of all substitutes and complements, as well as income levels of consumers 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 In economics, comparative statics is the comparison of two different economic outcomes, before and after a change in some underlying exogenous parameter. As a type of ''static analysis'' it compares two different equilibrium states, after the ...
. 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 entered o ...
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 Worker, employee for work (human activity), work done in a specific period of time. Some examples of wage payments include wiktionary:compensatory, compensatory payments such as ''minimum wage'', ''p ...
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 labour ...
. 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 a ...
economics, the money market is analyzed as a supply-and-demand system with interest rates 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 circul ...
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 central ba ...
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 very short-term borrowing (borrowing by banks from each other to meet their short-term needs) or the money supply, often ...
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 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. 8� ...
. Such methods allow solving for the model-relevant "structural coefficients," the estimated algebraic counterparts of the theory. The ''
Parameter identification problem In economics and econometrics, the parameter identification problem arises when the value of one or more parameters in an economic model cannot be determined from observable variables. It is closely related to non-identifiability in statistics and ...
'' 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 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 variables in a market economy, 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 focu ...
uses of demand and supply, different (and more controversial) theoretical considerations apply to such macroeconomic 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 circul ...
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, th ...
s, and to relate labor supply and labor demand to wage rates.


History

The 256th couplet of Tirukkural, 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'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''. 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 m ...
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 entered o ...
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 William Stanley Jevons (; 1 September 183513 August 1882) was an English economist and logician. Irving Fisher described Jevons's book ''A General Mathematical Theory of Political Economy'' (1862) as the start of the mathematical method in eco ...
,
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 Henry Charles Fleeming Jenkin FRS FRSE LLD (; 25 March 1833 – 12 June 1885) was Regius Professor of Engineering at the University of Edinburgh, remarkable for his versatility. Known to the world as the inventor of the cable car or telphera ...
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 In economics, comparative statics is the comparison of two different economic outcomes, before and after a change in some underlying exogenous parameter. As a type of ''static analysis'' it compares two different equilibrium states, after the ...
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'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'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 Post-Keynesian economics is a school of economic thought with its origins in ''The General Theory'' of John Maynard Keynes, with subsequent development influenced to a large degree by Michał Kalecki, Joan Robinson, Nicholas Kaldor, Sidney We ...
criticize the supply and demand model for failing to explain the prevalence of
administered prices Administered prices are prices of goods set by the internal pricing structures of firms that take into account cost rather than through the market forces of supply and demand and predicted by classical economics. They were first described by insti ...
, 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, 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 William Paul Cockshott (born 16 March 1952) is a Scottish computer scientist, Marxian economist and a reader at the University of Glasgow. Since 1993 he has authored multiple works in the tradition of scientific socialism, most notably '' To ...
's critique focuses on the unfalsifiability 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 a ...
, 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 e ...
, 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 *
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 Taxes and subsidies change the price of goods and, as a result, the quantity consumed. There is a difference between an Ad valorem tax and a specific tax or subsidy in the way it is applied to the price of the good. In the end levying a tax moves ...
* Elasticity * Excess demand function * Externality *
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 *
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 The law of supply is a fundamental principle of economic theory which states that, keeping other factors constant, an increase in price results in an increase in quantity supplied. In other words, there is a direct relationship between price and ...
*
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 *
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 * 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 1 ...
'',
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)
Marshallian Cross Diagrams and Their Uses before Alfred Marshall: The Origins of Supply and Demand Geometry
by
Thomas M. Humphrey Thomas MacGillivray Humphrey (born 1935) is an American economist. Until 2005 he was a research advisor and senior economist in the research department of the Federal Reserve Bank of Richmond and editor of the Bank's flagship publication, the '' ...
*
By what is the price of a commodity determined?
', a brief statement of Karl Marx'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