Necessary Facts: Supplies and Demands

Friday, November 25, 2011

Supplies and Demands

From "Inspired Business"
http://www.inspiredbusiness.eu/

In Economics 101, the Supply curve and the Demand curve are displayed. The point where they intersect is called “equilibrium” where the most efficient allocation of resources is claimed to occur. This ignores the fact that every point on either curve represents a choice, an exchange of a lower valued good (or service) for one of higher value.

On each curve, the quantity demanded (or supplied) changes. But where they intersect is only one such point. The other choices do not disappear. People are still demanding and supplying all along both curves.

The danger – the tragedy – is that claiming that the intersection of these two curves indicates a special equilibrium. This causes those in political control to believe that they should or must force all supplies and demands to be at this point. Interest rates are raised or lowered; money is created (rarely destroyed); tax laws are written or rewritten. In some societies criminal penalties are enacted and enforced for prices other than the approved one.

At the very least, and as the foundation of the wrongs cited above, economists teach that any other price except the equilibrium is inefficient and thus markets are not perfect.

The curves should be called "Supplies" and "Demands" and their intersection should called the "modal point." This is where "most" trades take place. But nothing else is special about it.