supply and demand(redirected from Theory of supply and demand)
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supply and demand,in classical economics, factors that are said to determine price, by correlating the amount of a given commodity producers hope to sell at a certain price (supply), and the amount of that commodity that consumers are willing to purchase (demand). Supply refers to the varying amounts of a good that producers will supply at different prices; in general, a higher price yields a greater supply. Demand refers to the quantity of a good that is demanded by consumers at any given price. According to the law of demand, demand decreases as the price rises. In a perfectly competitive economy, the combination of the upward-sloping supply curve and the downward-sloping demand curve yields a supply and demand schedule that, at the intersection of the two curves, reveals the equilibrium price of an item. Theories of supply and demand had their roots in the early 20th cent. theories of Alfred MarshallMarshall, Alfred,
1842–1924, English economist. At Cambridge, where he taught from 1885 to 1908, he exerted great influence on the development of economic thought of the time; one of his students was John Maynard Keynes.
..... Click the link for more information. , which recognized the role of consumers in determining prices, rather than taking the classical approach of focusing exclusively on the cost for the producer as a determinant. Marshall's work brought together classical supply theory with more recent developments concentrating on the utility of a commodity to the consumer (see valuevalue,
in economics, worth of a commodity in terms of other commodities, or in terms of money (see price). Value depends on both desirability and scarcity. The marginal theory of value, pioneered in the late 19th cent.
..... Click the link for more information. ). More recent theories, such as indifference-curve analysis and revealed preference, offer more flexibility to the supply and demand theories created by proponents of marginal utility. The theory of elasticity is significant as well: it shows how certain commodities will bear a substantial rise in price if there is not an equitable substitute available, while other easily replaceable commodities cannot do so without losing business to competitors. See also competitioncompetition,
in economics, rivalry in supplying or acquiring an economic service or good. Sellers compete with other sellers, and buyers with other buyers. In its perfect form, there is competition among many small buyers and sellers, none of whom is too large to affect the
..... Click the link for more information. .
See L. Klein, The Economics of Supply and Demand (1983); K. Cuthbertson, The Supply and Demand for Money (1985).
Supply and Demand
economic categories of commodity production.
Demand represents social needs mediated and limited by money (seeNEEDS, ECONOMIC). Most of the populace’s need for consumer goods and services takes the form of effective monetary demand. Enterprises’ needs for the means of production also take the form of demand for the specific kinds of means and objects of labor.
Supply, in the most general sense, was defined by K. Marx as “the product available in the market, or that which can be delivered to it” (K. Marx and F. Engels, Soch., vol. 25, part 1, p. 203). It comprises the commodity stocks that satisfy demand and the mass of commodities that can be delivered to the market, with due regard to production capacity and transportation availability with respect to the delivery of commodities to areas where they are in demand. Since production and consumption coincide in neither time nor space, transportation is of the utmost importance in ensuring commodity supply. The period within which commodity stocks must be transported or production capacities brought into use depends on the specific features of the demand for individual commodities. For perishable commodities, such as bread, milk, and certain vegetables, the period is less than 24 hours; for articles of mass consumption, it may be several days or weeks, and for durables, several months.
Supply is essentially contingent on production development, since production development ultimately determines the volume of commodity stocks that face the demand. As scales of production increase and as the commodity-movement management system and transportation facilities improve, commodity supply capacities increase. To ensure that supply meets demand, information on demand and on production and inventories is needed.
Supply and demand are joined in a complex dialectical interaction, which mediates the relations between production and consumption and which appears in the market as the external manifestation of economic relations. At the same time, they are possessed of a relative independence, they act as antithetical and interacting elements of the market, and they are realized in the buying and selling of commodities. The unity of the use-value and value of commodities is expressed in the unity of supply and demand.
The character of the relations between supply and demand is determined by the objective economic laws inherent in a given social formation. In capitalist society, supply and demand are characterized by antagonistic contradictions, which stem from the fundamental contradiction in capitalism between the social character of production and private-capitalist form of appropriation. These relations, through price fluctuations, affect the tempos and proportions of production. Thus, through the mechanism of supply and demand and the fluctuation of market prices around value—or, more precisely, around the production price, the transmuted form of value—the law of value takes effect as the spontaneous regulator of capitalist production (seeVALUE, LAW OF). The balance of supply and demand is achieved through the market, through the mechanism of prices, by means of the flow of capital and labor power from one branch of the economy to another, by means of competition, and by means of other factors. However, capitalism is characterized by a permanent disproportion between supply and demand. Owing to inflation, unemployment, and limited effective monetary demand on the part of the working people, supply exceeds demand. This disproportion causes cyclical economic crises of overproduction.
The ratio between supply and demand and the laws that govern supply and demand are important under socialism as well. The preponderance of public ownership of the means of production makes it possible to maintain a balance between production and consumption, and between supply and demand, in planned and conscious fashion. The study of supply and demand yields information used in planning the volume and structure of production and in setting prices. The planning of the national economy and, hence, of supply and demand is subject to the fundamental economic law of socialism and the entire system of economic laws. The law of planned proportionate development of the national economy requires conscious, purposeful, and centralized regulation of the entire economy to ensure proportionality among the various spheres and branches of the socialist economy and to ensure balance and proportionality between production and consumption and, hence, between supply and demand. Balance between supply and demand is to be understood not as exact equality between the two—although this is not excluded—but as a coordination of development, a dynamic proportionality, that ensures high production growth rates, a fuller satisfaction of the populace’s demand, and unfettered sale of commodities, with minimum costs of production and circulation.
The ratio between supply and demand is also subject to the law of increasing requirements. As a result of this law and as a result of population increases, the systematic growth of income inherent in socialism under conditions of price stability, and other factors, there is a constant increase in effective monetary demand. Supply must therefore exceed demand; otherwise, a discrepancy may arise between effective monetary demand and the capacity to satisfy this demand. The development of production, the enlargement and renewal of the commodity selection, the increase in the standard of living, and the growing exactingness toward commodity quality—all alter demand. If the commodity supply is to satisfy demand, therefore, it must grow more rapidly. “The volume [of commodity supply] must ... be larger than the average sale or the average demand. Otherwise, the excess over these averages could not be satisfied” (K. Marx, ibid., vol. 24, p. 166). This is also necessary for the formation of commodity reserves so as to cover a possible discrepancy between the selection of commodities offered and the demand structure and for the creation of insurance stocks in case of natural disasters and losses (within the norms) objectively caused by the very process of storage, transportation, and sale of commodities.
Supply and demand must balance not only in terms of volume and structure but also in terms of geography—national and regional—and time of year. If, under conditions of general balance between supply and demand as a whole, the balance is upset—that is, if some commodities are in oversupply and others are in short supply, if some commodities are in oversupply in certain regions and in short supply in others, or if some commodities are in oversupply in certain seasons and in short supply in others—commodity circulation will be disrupted, the satisfaction of effective monetary demand will be interrupted, inventories will increase to excess, and the role of money will be diminished.
Balance between supply and demand can be achieved in various ways, such as economic policy on the part of the state, the issuance of obligatory plan targets, and the setting of the volume and selection of commodities produced and marketed, the volume of imports, the prices for the overwhelming majority of commodities, and the size of the populace’s monetary income. Other such ways include the planned utilization of production capacities, raw materials, and the labor supply, as well as capital investments in promising branches of the national economy, study of demand and market conditions and management of commodity movement accordingly, and the production of commodities on the basis of commercial orders.
Consequently, the principal elements of the ratio between supply and demand are regulated by the state in the interests of society as a whole. Under socialism, at the same time, certain discrepancies, certain nonantagonistic contradictions, are generated in the very process of production and consumption development—contradictions between supply and demand, contradictions between society’s needs and production capacities. As socialist society develops, these contradictions are resolved by improved production and the purposeful molding of demand on the part of the population.
REFERENCESMarx, K. Kapital, vol. 3. In K. Marx and F. Engels, Soch., 2nd ed., vol. 25, part 1.
Marx, K. Nishcheta filosofii. In ibid., vol. 4, p. 80.
Arkhiv Marksa i Engel’sa, vol. 4. Moscow, 1935. Page 175.
Lenin, V. I. “Po povodu tak nazyvaemogo voprosa o rynkakh.” Poln. sobr. soch., 5th ed., vol. 1.
Lenin, V. I. Razvitie kapitalizma v Rossii. Ibid., vol. 3.
Gogol’, B. I. Platezhesposobnyi spros i roznichnyi lovarooborot. Moscow, 1968.
Korzhinevskii, I. I. Osnovnye zakonomernosti razvitiia sprosa v SSSR, 2nd ed. Moscow, 1971.
Darbinian, M. M. Kommercheskaia rabota i izuchenie sprosa v torgovle. Moscow, 1971.
Stolmov, L. F. Izuchenie i prognozirovanie pokupatel’skogo sprosa. Moscow, 1972.
M. M. DARBINIAN