Supply and demand

Empirical methods Prescriptive and policy In microeconomics, supply and demand is an economic model of price determination in a market.

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?"

The demand schedule is defined as the willingness and ability of a consumer to purchase a given product at a certain time.

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?"

Both sorts of curve were popularised by Alfred Marshall who, in his Principles of Economics (1890), chose to represent price – normally the independent variable – by the vertical axis; a practice which remains common.

[3] 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.

This would cause the entire demand curve to shift changing the equilibrium price and quantity.

The equilibrium quantity increases from Q1 to Q2 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.

This makes analysis much simpler than in a general equilibrium model which includes an entire economy.

[5] 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.

[9] In both classical and Keynesian economics, the money market is analyzed as a supply-and-demand system with interest rates being the price.

[11] According to some studies,[12] 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[13] in scarce resource environments.

[14] Demand and supply relations in a market can be statistically estimated from price, quantity, and other data with sufficient information in the model.

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.

[15] 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, who wrote: "If desire for goods increases while its availability decreases, its price rises.

[17] In John Locke's 1691 work Some Considerations on the Consequences of the Lowering of Interest and the Raising of the Value of Money,[18] 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.

"[20] From Law the demand part of the phrase was given its proper title and it began to circulate among "prominent authorities" in the 1730s.

[19] 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.

"[19] It was not until 1767 that the phrase "supply and demand" was first used by Scottish writer James Denham-Steuart 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 and competitive analysis.

In 1803, Thomas Robert Malthus used the phrase "supply and demand" twenty times in the second edition of the Essay on Population.

[19] And David Ricardo in his 1817 work, Principles of Political Economy and Taxation, titled one chapter, "On the Influence of Demand and Supply on Price".

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.

[23] The model was further developed and popularized by Alfred Marshall in the 1890 textbook Principles of Economics.

[21] 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.

[24] The notability of Sraffa's critique is also demonstrated by Paul Samuelson's comments and engagements with it over many years, for example: 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 are not responsive to changes in demand up to capacity.