On Supply and Demand

This is a short essay that I have written to further define terms and to make sure that anyone reading this collection of essays understands the more basic principles of micro-economics.

Supply and demand is the basic concept of markets that attempts to define the relationship between the consumer and the producer of goods. It has been defined as a natural law of economic activity. Packed into that definition is the understanding that on a macro scale, human psychology trends in a generic pattern when it comes to consumption of goods and services.

In short, that pattern is that when a demand for a good or service is greater than the supply or production capacity of that good or service, the subsequent price will increase to a level that will naturally ration that good or service until supply can be increased to match demand more appropriately. Such natural rationing has proven throughout history to be more effective than synthetic rationing done by governments since it is driven by a natural consequence to supply.

When supply is interrupted by the use of extra-market force (i.e. governmental force, private cartelism, and etc.) the price of the good will increase, which will decrease the demand for that good. This is the basis for why governmental forces and private cartels tend to last only a short time relative to the overall market timeframe.

Supply and demand will, therefore, necessarily limit cartels and monopolies in a very serious way, is has been shown through the limited history of capitalism.

Murray Rothbard worked his way through the economic history of the United States and one of the topics he touched on was the cartelization of the railroads in the 1800s. The railroad industry tried multiple times to form trusts and cartels in order to corner the market and maximize profits, but they were fighting against the law of Supply and Demand and they continued to lose time and time again. It wasn't until they gained the blessing of the government through a number of laws and contracts that allowed them to prop themselves up as a sanctioned trust. It was not a movement of activists that stopped the trusts from forming, nor was it protestors, rather it was simply a loss of demand in the railroad sector of the economy because the cost was too great. People couldn't afford to use the railroads as a cartelized economic entity, so they didn't and the cartel failed.

This is why the argument for government control to stomp on monopolies fails the test of logic. The only time you would need government to solve the problem of monopoly is if the monopoly is enforced by the government, otherwise it would naturally fail simply because demand would decrease until the monoplized goods would no longer be profitable.

If Walmart decided to buy up all of its competitors so that it could raise its prices and lower how much it pays its employees in order to maximize profits, there comes in a problem. If there is no competition and prices are able to rise freely, then higher prices will necessarily exclude certain people from participating in the Walmart market. Those people would have to seek such goods from other sources. But perhaps Walmart doesn't care because that is the bottom 10% of their customers. The rest will continue to pay higher prices because they perceive Walmart as the only place to buy their food and toys and tools.

Now, losing that lower 10% of customers may seem insignificant to Walmart, but alas they must find other ways to feed themselves and this creates an opportunity for competition in the market. Demand for goods from Walmart at this point will be stagnant since they have raised prices subjectively rather than according to demand. Meanwhile, some other small company will be selling to the lower 10% at prices that they can afford. If the other 90% find out that they can get their salt for a whole lot less, then some of them may start buying from this other company. This will cause demand for salt at the other company to rise very quickly and demand for salt at Walmart to drop equally.

Perhaps then Wonderbread can be purchased more cheaply at this other company. Then demand for Wonderbread at this new lower price will rise quickly. Eventually, this new company will be making quite a bit of money and they can expand and challenge Walmart. Walmart will then be forced to lower prices to meet demand. The law of Supply and Demand is called a law because it has always worked this way. No company can keep a sector of the market cornered indefinitely, nor even very long.

Supply and demand is not a man-made law either. It isn't something that some guys got together and decided upon. It is more like a law of physics. It exists as an observation of the natural order. It is a law that must be taken into consideration when creating new frameworks for a national economy. If someone wants to create a utopia from a communalist ideology, then they must consider how their framework will interact with supply and demand. If it works against supply and demand, then such a framework will inevitably need to fight against such laws continually. If the framework takes into account the law of supply and demand, then perhaps it will have a chance to exist for more than a few short generations.


The economic system in the US continually works against the law of supply and demand, and therefore continually suffers from a misallocation of resources. The government tends to direct resources as it sees fit and the result tends to be market instability in the long term. The US government trades longterm stability for short term growth, as we can see in what is being hailed as “Trump's Economy”. He is trading longterm stability so that the economy during his term as president can look “great”.

In the end, the resources could be allocated in a more efficient and beneficial ways if the government would allow them to, but that would appear weak. How would Trump or Obama or Bush or Clinton get re-elected if they appeared weak? Even Reagan did a pretty bad job of allowing supply and demand to allocate resources, though he is called “the free market president”. His presidency was the furthest thing from acknowledging and respecting the law of supply and demand.

I would insist that my readers try reading a few things further about supply and demand to gain a fuller understanding of its roots and how it works because regardless of the type of economy a landmass claims, they must all obey this law, as it is one of the only things in economics that has yet to be contradicted effectively.

The Attempts to Form Cartels

Supply and Demand, definition

Foundations of Economic Analysis