Supply and Demand: A Primer
 
There is a old economists joke, originating with the English Historian Thomas Carlyle, that if you want a “learned economist” all you have to do is get a parrot and train the bird to squawk “supply and demand” in response to every question.  
This is unfair. But the “theory of supply and demand” is a central part of economics. It encapsulates the way many economists think about, conceptualize, and reify markets. It is held to be widely applicable and underpins economists’ scientific pretensions. It is a model of the way many economists try to think about many problems. And it is used to analyze problems even when the theory of supply and demand appears not to be directly relevant.
Every market has two sides – buyers and sellers. The buyers are the “demand side” of the market. Sellers are the “supply side” of the market. Alfred Marshall, one of the principal founders of modern economic theory, famously compared the supply and demand sides to the two blades of scissors. One won't cut. You have to have both.
 
Demand: Economists assume that there is a systematic relationship between the price in the marketplace and the quantity that people are willing and able to buy. This relationship is called “the demand relationship” or simply “demand.” The convention in economics is to use the word “demand” to mean the specific quantity that people are willing and able to purchase. Typically the relationship is inverse, i.e. the lower the price the more people demand. Diagrammatically the demand schedule is downward sloping.
 
Supply: Economists treat supply symmetrically as demand, i.e. they treat supply as a relationship between price and the quantity supplied. Usually the relation is direct. Basically as price increases more is supplied as higher costs can be covered and higher profits made. Diagrammatically the supply schedule is upward sloping.
 
Equilibrium of Supply and Demand: In economic theory, the interaction of supply and demand is understood as equilibrium. Market “equilibrium” exists when the price is high enough so that the quantity supplied just equals the quantity demanded. In a diagram the “equilibrium” price is the price at which the demand and supply curves cross. The corresponding quantity is that which is traded in market equilibrium.
 
The theory of supply and demand is a theory of price and output in highly competitive markets. It embodies a range of explicit and implicit assumptions that economists are variously aware of.
The supply and demand diagram is a chief pedagogic aid that has been taught to millions of students in introductory courses in economics. In the conventional wisdom the simple lessons embodied in this basic “Supply and Demand” diagram are further extended, formalized and generalized to underpin many of the proofs and policy prescriptions publicly espoused by economists.
In the conventional wisdom markets are to be extended, unfettered and made more competitive. Economists point to the social benefits of markets which simultaneously maximize both consumer satisfaction and producer surpluses. Such policy prescriptions are typically promoted with evangelical and religious zeal. And they have entered into the wider public consciousness.
The belief in the efficacy of unfettered markets is intertwined with wider social beliefs about the importance of religious and economic freedom and the role accorded to the state in contemporary Western civilizations. Indeed on many levels it appears to be an integral part of the American Way and Dream.
Such considerations point to the nexus between the political and cultural fabric of society and its institutional arrangements. A market does not exist in a vacuum. It is embedded in a wider system of social relations and legal arrangements. Standard market or “Supply and Demand” representations do not promote such understanding.
Saliently, the validity and applicability of the underlying assumptions of the conventional wisdom are frequently overlooked and unquestioningly accepted by many students of economics. Yet the social consequences of such philosophy are real and profound, striking at the heart of questions concerning the role of the individual, state, and an array of intermediate institutions such as the large firm and the scientific, educational and legal establishments.
 
 
 
S&D
Oil on Canvas
36” x 48”
2005