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Demand and Supply of Goods

In: Business and Management

Submitted By sanjita
Words 1017
Pages 5
When supply and demand are in balance, the economy is said to be in equilibrium between price and quantity.

This is a very simple principle but is it actually a “law” and is it completely true?

When we examine specific instances of goods and services against a particular demand, we see that this behavior seems to hold true and so where could there be a problem with this model?

Let’s examine the supply side first. This is the component that provides the goods and services, so effectively this is the element that brings things to “market” for which the consumer or demand side reacts. One of the big items considered on the supply side is the cost of labor.

“…as wages rise, the supply of goods and services is reduced, because wages are the input price of labor. Labor accounts for about two-thirds of all input costs, and thus wage increases create supply reductions …” (Introduction to Economic Analysis, McAfee)
No doubt, this all makes sense and probably sounds like a statement of the obvious. However, let’s examine the demand side of this relationship. What is it? Where is it? How does it manifest?

Here’s where we encounter the problem with this model. There is no independent demand side of the equation. Demand is based on the consumption of the goods and services provided by the supply side, but the means by which this demand is met requires trade in exchange for the item(s) involved. In modern times that trade is through the use of money (or credit).

So the obvious question becomes, where does the consumer or “demand side” acquire its money? The answer is; from the supply side. In other words, despite the statement above which indicates that labor accounts for about two-thirds of the input costs, in reality, what is happening is that the supply side (labor cost) is subsidizing and creating the consumer or demand side of the equation. There is

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