Supply and demand

Glossary definition: The market forces that determine prices.

In plain words

Demand is how much of a good people want to buy at each price; supply, how much they want to sell. As the price rises, buyers ask for less and sellers offer more; as it falls, the opposite happens.

The market price is the one at which the quantity demanded meets the quantity supplied. Nobody sets it: it emerges from the highest price each buyer will pay and the lowest price each seller will accept.

An example

If in one year hens lay many more eggs, supply rises and the price of eggs falls until buyers are found for all of them. If a cold spell cuts output, the price rises: the dearer eggs go to those who value them most, and the high price gives other producers a reason to bring more.

The Austrian viewFor the Austrian School the supply and demand “curves” are not mechanical laws; they sum up the subjective valuations of real people. Prices convey knowledge that exists in no single mind, as Hayek showed. When government sets a maximum price below the market price (rent control, for example), demand exceeds supply and shortages appear; when it sets a minimum price above it, unsold surpluses pile up.

In the original“The market supply and demand schedules are themselves determined by the minimum selling prices and maximum buying prices of all the individuals in the market.”

Murray N. Rothbard, Man, Economy, and State with Power and Market, Chapter 2 — Direct Exchange · 5. Determination of Price: Equilibrium Price · mises.org ↗

Definitions are from the site’s Glossary; the examples and the “Austrian view” are Praxeologos’s reading. Links to outside sources open in a new tab.