Supply Demand

Jul 27, 2022 | Finconomics 101

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Summary: In classical economics, price acts as a clearing agent for the production and demand of goods & services. If prices increase, demand declines while supply increases (as more companies get in on the profits) until equilibrium is reached. This chart shows how much demand can be expected at a given price and how much quantity will be supplied.

But what happens when the natural demand for necessities (like food & energy) is higher than what consumers can afford? In that case, higher prices force actual demand lower by depriving people of what they need to live. This is how protests start!

Classical economics may work for discretionary goods & services (like vacations to the Islands and luxury cars) but can not be applied to the demand for services & goods necessary for human survival. Society requires the supply of a sufficient quantity of affordable necessities. If this isn’t possible to accomplish with producers generating at least a small profit, then subsidies are necessary from charities (preferably) or the government (last resort). 

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