Supply and demand

Because of their importance to the development of economic theory, an appreciation of the significance of the concepts of supply and demand is essential to the understanding of much of the subject-matter of economics. This article seeks to explain their significance in non-technical terms, as well as introducing the lay reader to some of the associated terminology used by economists and providing a simple introduction to the concepts for students of economics.

Definitions of the terms used in the article that are shown in italics can be found on the Related Articles subpage, and a selection of the diagrams and mathematical equations that are conventionally used for teaching purposes can be found on the Tutorials subpage

Overview: origins and applications

The proposition that prices are determined by supply and demand is so familiar that it seems like a statement of the obvious. In fact, it was not generally known, even to eminent intellectuals such as Adam Smith, John Stuart Mill and David Ricardo, until the idea was popularised by Alfred Marshal towards the end of the nineteenth century . Since then it has become universally accepted that demand rises in response to a reduction in price, that supply rises in response to an increase in price, and that price somehow settles to a level where demand is equal to supply. That proposition has come to be been termed "the law of supply and demand" and is often thought to be as firmly established as the law of gravity. In fact it is what Marshall termed "a statement of a tendency", depending upon particular premises about human behaviour, and falling short of a complete explanation of the market mechanism. It has nevertheless survived in general use as a robust statement that reflects widespread experience. In economics, it has served as a tool that has been used in the construction of other theories and has generated a terminology that has been widely used in discussions among economists.