Part VII

NEW DEFINITIONS OF SUPPLY AND DEMAND

 by

M. Northrup Buechner

A series of essays based on Objective Economics: How Ayn Rand’s Philosophy Changes Everything about Economics by the author.

A preliminary step to saving the Law of Supply and Demand is to distinguish demand from desire, want, and need. (This is standard practice in economics, a practice with which I agree.) To demand a good, it is not enough to want a good. I want a Lamborghini, but I do not demand a Lamborghini. I am not part of the Lamborghini market. Demand is not just desire. The standard formulation is that demand requires desire plus means. In economic exchange, the means is money. For a man to demand a good, he must have the money and be ready to spend it on the product he wants. An individual’s demand is the quantity he wants to buy. This is a hard-hearted and hard-headed concept of demand. It makes demand a concept of this world and keeps economic theory in this world.

Now, to save the Law of Supply and Demand, we have to abandon the concepts of supply and demand as curves and define them the way all noneconomists think of them, as simple concrete quantities, such as two tons of steel a day, six feet of lumber an hour, and three million automobiles a yearDemand means the quantity demanded over some time period and supply means the quantity supplied over some time period. (A time period has to be specified to makethe quantitmeaningful.) These concepts of supply and demand are meaningful across the whole economy. Every business has supply and demand in exactly this sense of simple quantities. (If there are exceptions, I would like to hear about them.)

Now, let us see how the Law of Supply and Demand works with these definitions. Supply is the quantity a businessman offers for sale. Usually this quantity is equal to the quantity his customers want to buy. The normal pattern (not the universal pattern) is that the businessman sets a price at which he expects to sell a quantity sufficient to maintain his business and make a profit. Then he sells all that his customers want to buy at that price. If they want to buy less than he expected, he offers less for sale. If he sells more than he expected, he offers more for sale to meet his customers’ demand. Thus, there is an ongoing tendency, motivated by the businessman’s self-interest, for the supply to equal the demand in all the product markets of the economy. Of course, supply and demand are not exactly equal at every moment. But if we allow time for businessmen to adjust their supply to variations in demand, demand will beapproximately equal to supply, on average, over one or two months. This is the Law of Supply and Demand with supply and demand conceived of as quantities, not curves. The Law says that over time, the quantity demanded of every good will tend to equal the quantity supplied.

Nevertheless, there are still all the exceptions identified in Part II of this series. How can we integrate those exceptions with the Law of Supply and Demand as I have defined it here? I will take up that problem in my next post.