- [Instructor] Supply and demand.
What does that mean?
Well, you've probably seen this graph a thousand times.
You probably thought and maybe were taught
supply is how much stuff there is.
Demand is how much stuff I want.
But actually, supply is the relationship
between the price of a good and how much of that good
sellers are willing to bring to the market.
Put another way, it's not the amount
of something sellers have, but how much they want to sell.
Demand is the relationship between the price of a good
and how much of that good people are willing to buy.
Or we could say not the amount of the product
that consumers want, but how much they want to buy.
So the key is changing relationships, not constant.
Stick with us for an example.
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Bread, my favorite.
Sourdough, of course.
You might think my demand for sourdough bread
is super high because I love it.
And yeah, I do.
I want a ton of sourdough bread,
but there's more to the story.
When measuring my demand for sourdough bread,
we have to take something else into account:
how much it costs.
If suddenly, a loaf of sourdough cost $100,
how much of it would I want then?
Not much, actually.
Maybe none.
Maybe I try rye.
Now, say you're a baker.
If people stop liking sourdough,
it doesn't matter how much of it you have.
You won't supply.
That is, put it on your shelves much, if any.
But if you have a line of people outside your bakery
dying to buy sourdough, and they're willing to pay
$100 a loaf, you're going to supply,
well, as much as you possibly can.
Common sense, right?
Well, kinda.
The principle of supply and demand
was observed in markets long before
it was ever outlined in a published work.
And yeah, it's ingrained in all of us.
But it wasn't until the classical liberals
began to write about markets that we truly studied the idea.
And even John Locke didn't use the term
supply and demand in 1691,
but he did describe the phenomenon.
"The price of any commodity rises or falls
by the proportion of the number of buyers and sellers.
This rule holds universally."
About 80 years later, in 1767,
James Steuart became the first
to put supply and demand in print.
10 years after that, in "The Wealth of Nations",
Adam Smith further developed our understanding
of the relationship between supply and demand
into something close to what we know today.
He wrote, "The market price of every particular commodity
is regulated by the proportion between the quantity
which is actually brought to the market,
and the demand of those who are willing
to pay the natural price of the commodity."
Finally, in 1848, John Stuart Mill's
"Principles of Political Economy"
analyzed supply and demand together
to understand equilibrium price or market clearing price.
The price at which the quantity demanded by consumers
is equal to the quantity supplied by producers.
That's where we got graphs.
All the graphs, including Alfred Marshall's
supply and demand curves in 1890.
But again, because supply and demand
are evolving relationships between the price
and quantity of a good, not constants,
the curves are subject to change.
So to return to sourdough bread,
while each baker has a different understanding
of what it costs to bake a loaf,
and while each buyer has a different understanding
of what a loaf is worth,
throughout an entire city or country,
and through thousands of daily purchases and sales,
we might arrive at an equilibrium price of $3 per loaf.
And it's unlikely, though not impossible,
that the price of any one loaf
will differ drastically from that price.
Interestingly, as Friedrich Hayek pointed out
in his 1945 essay, "The Use of Knowledge in Society,"
"No one person needs to know
why the price of something changed,"
whether total hypothetical here,
demand for store-bought sourdough bread
fell when a pandemic left people
with more time at home to bake their own,
or whether supply rose because of some new baking
technique that made it cheaper to produce sourdough.
Doesn't matter.
Often without realizing it in a free market,
people will adjust their buying and selling behaviors.
"So what?" you might ask.
The law of supply and demand
runs in the background of our lives
like an air conditioner or refrigerator, humming quietly.
So why bother thinking about it?
We notice when that hum suddenly stops, don't we?
And we notice when this system of supply,
demand, and price is interfered with.
Take the US federal government's price controls
on natural gas in the 1960s and '70s.
Suddenly, producers were discouraged
from supplying and selling gas.
It became less profitable.
Consumers were encouraged to buy more.
It magically became cheaper.
You can guess what happened.
Especially in the Midwest, cities experienced
a series of natural gas shortages.
That's what happens anytime price controls
are issued and enforced.
We get shortages.
So that's supply and demand in less than six minutes.
What questions do you have?
Let us know in the comments below.
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Check it out at learnliberty.org.
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