Archive for the ‘Supply’ Category

The law of supply and demand isn’t a law!

August 13, 2007

“One of the oldest principles of Traditional Economics is the law of supply and demand.  A basic prediction of this ‘law’ is that the counterbalancing forces of supply and demand will drive a market to an equilibrium price and quantity level.”

“For example, if a car company introduces a new model that suddenly becomes popular, the company will typically raise the price while demand exceeds supply, expand production, and then lower the price once demand has cooled off and supply has caught up.”  (Lesson learned: don’t buy something when it first comes out; wait a few months and you can get it at a lower price)

“If, however, we zoom into a more fine-grained level, we see that real-world markets are almost never at equilibrium, supply rarely equals demand, and markets rarely come into balance.  In fact, virtually all markets are built around the assumption of disequilibrium rather than equilibrium.  Most markets have stocks of inventory and order backlogs.”

“Your local car dealer has a parking lot full of vehicles that are slower selling and an order backlog of ‘hot’ vehicles that customers are waiting for.”

“The law of supply and demand isn’t a law after all (at least not in any scientific sense); rather, it is more appropriately the rough approximation of supply and demand.”

— The Origin of Wealth by Eric D. Beinhocker