The Law of Supply and Demand

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It seems to me that the most basic law underlying most things of an economic nature is the law of supply and demand.

The Law of Supply and Demand. 1) If the demand goes up for a good or service and the supply remains constant, the price will go up. 2) If demand drops and the supply remains constant the price will drop. 3) If the supply increases and the demand remains constant the price will drop. 4) If the supply drops and the demand remains constant, the price will go up.

One can understand the basic mechanism behind this phenomenon by considering a horse auction. If, in a horse auction, there are a great many buyers all wishing to buy a horse and only a few horses being offered, the price received for the horses will probably be high because of the competition among the buyers in bidding for a horse (they will all be trying to outbid one another). If, on the other hand, there are only a few buyers present who wish to buy and many horses being offered the price received for a horse will probably be low due to lack of competition for the horses and sellers who drop their price in their desire to sell). For a particular set of buyers the price for a horse will tend to drop as the number of horses for sale increases (i.e. the supply increases). For a particular set of horses being offered the average price received per horse will tend to increase as the number of buyers increases (i.e. the demand increases).

One can see the Law of Supply and Demand in action in connection with about everything that is bought and sold — whether we are talking about wheat, houses, sugar, bananas, gold, oil, copper, stocks or whatever. If the demand for some commodity or service increases and the supply remains constant, the price will tend to go up. If the demand for a commodity or service decreases and the supply remains constant, the price will tend to decrease. If the world does not produce enough wheat to feed it in a particular year creating a shortage of wheat the price will go up for wheat. Competition for it will force up the price. The same applies to soy beans, oranges, apples, eggs, beef or whatever. On the other hand, if the world produces much more wheat in a year than is needed the price of wheat will fall.

I have seen the price of eggs in ALDI’s at as little as $0.68 a dozen and as much as $4.99 a dozen. Why such a difference? It is all about supply. If there is a scarcity of eggs the price goes up. If there is a great scarcity the price goes up really high. On the other hand, if there is a great abundance of eggs the price may drop down very low.

The Law of Supply and Demand also tends to hold in regard to labor. If there is a scarcity of labor the cost of labor (i.e. wages) tends to be high. If there is an abundance of labor the cost of labor (wages) tends to be low. The work world in a developed economy consists of a great myriad of niches corresponding to various technical specialities. How much a person receives in compensation for his labor depends on how much demand there is for people in his particular speciality and how many people there are in his speciality. If there is high demand for people in a particular speciality and few people in it (i.e. a shortage of workers in it), the salary will probably be high. If there is little demand for workers in a particular speciality, wages are likely to be low.

If one is an unskilled person with no speciality how much he makes will depend on how much competition he faces in regard to unskilled people seeking the same kind of work he seeks. An abundance of labor drives down wages. If there are a great many people seeking a limited number of unskilled jobs (i.e. if there are more seekers than jobs) the wages for unskilled jobs are likely to be low. Many people seeking a limited number of low wage jobs will drive down wages. Poor people will compete with each other for the lowest paying, least desirable jobs and employers will take advantage of the situation to lower wages and get cheap labor. In a poor country with a huge number of uneducated people the wages for unskilled work are likely to be low. Due to competition the going wage for unskilled work will become low.

● If a whole lot of people want to buy something and the supply is limited, that pushes up the price. For example, if a whole lot of people want to buy wheat and there is a limited supply of wheat, that pushes up the price of wheat.

● If a whole lot of people want to sell something and there is a limited demand for it, that pushes down the price of the item. For example, if a whole lot of people want sell their labor and there are a limited number of jobs, that pushes down the price for labor.

It has been charged that “capitalism created masses of people who were poverty stricken.” If a whole lot of people want a limited number of factory jobs, that will push down wages and one could understand how industrialization and automation could create poverty. The steam engine, the spinning jenny, power loom, cotton gin, etc. destroyed many occupations and huge numbers of jobs. They put huge numbers of people out of work. Machines and automation greatly reduce the number of jobs required to do something. Computers and the internet have destroyed huge numbers of jobs.

In summary:

Law of Supply and Demand

1. An increase in demand causes an increase in price. A decrease in demand causes a drop in price.

2. An increase in supply causes a drop in price. A decrease in supply causes an increase in price.

In connection with the Law of Supply and Demand there is another market mechanism that comes into operation:

1. When there is a surplus prices fall and businesses respond by producing less causing a drop in supply. 2. When there is a scarcity prices rise and businesses respond by producing more causing an increase in supply.

We thus have here a feedback type mechanism, a self-correcting mechanism, that tends to keep prices constant.

Because of this free market mechanism we can see why price caps on rents (as with rent control laws) tend to end badly. Such caps interfere with the natural self adjusting free market mechanism. If there is a cap on rents and a shortage of rental housing occurs there is no incentive for builders to build more rental housing. With passing years one ends up with a lot of old dilapidated rental housing, no new rental housing, a rental housing shortage, and a lot of homeless people. On the other hand, if there were no cap on rent, then rents would go up creating an incentive for builders to build more rental housing. (In addition to this, the idea of the state putting a cap on how much an owner of rental property can charge in rent is morally wrong. It ought to be illegal. How much rent an owner charges for his own property is not the state’s business and such laws suppress and limit the property values of rental properties causing financial harm to rental property owners. Such laws are passed by liberals with the idea of aiding the poor at the expense of the rich with the end result of hurting both.)

15 Dec 2022