The law of supply and demand, which dictates that a product's availability and appeal impacts its price, had several discoverers. But the principle, one of the best-known in economics, was noticed in the marketplace long before it was mentioned in a published work – or even given its name.
Philosopher John Locke is credited with one of the earliest written descriptions of this economic principle in his 1691 publication, Some Considerations on the Consequences of the Lowering of Interest and the Raising of the Value of Money. Locke addressed the concept of supply and demand as part of a discussion about interest rates in 17th-century England. Many merchants wanted the government to lower the cap on interest rates charged by private lenders so that people could borrow more money and thus purchase more goods. Locke argued that the free-market economy should set rates because government regulation could have unintended consequences. If the lending industry were left alone, interest rates would regulate themselves, Locke wrote: "The price of any commodity rises or falls, by the proportion of the number of buyers and sellers."
Sir James Steuart
Locke did not actually use the term "supply and demand," however. Its first appearance in print came in 1767, with Sir James Steuart's Inquiry into the Principles of Political Economy. When Steuart wrote his treatise on political economy, one of his main concerns was the impact of supply and demand on laborers. Steuart noted that when supply levels were higher than demand, prices were significantly reduced, lowering the profits realized by merchants. When merchants made less money, they could not afford to pay workers, resulting in high unemployment.
Adam Smith dealt extensively with the topic in his 1776 epic economic work, The Wealth of Nations. Smith, often referred to as the Father of Economics, explained the concept of supply and demand as an "invisible hand" that naturally guides the economy. Smith described a society where bakers and butchers provide products that individuals need and want, providing a supply that meets demand and developing an economy that benefits everyone.
After Smith's 1776 publication, the field of economics developed rapidly, and refinements were to the supply and demand law. In 1890, Alfred Marshall's Principles of Economics developed a supply-and-demand curve that is still used to demonstrate the point at which the market is in equilibrium.
One of Marshall's most important contributions to microeconomics was his introduction of the concept of price elasticity of demand, which examines how price changes affect demand. In theory, people buy less of a particular product if the price increases, but Marshall noted that in real life, this behavior was not always true. The prices of some goods can increase without reducing demand, which means their prices are inelastic. Inelastic goods tend to include items such as medication or food, that consumers deem crucial to daily life. Marshall argued that supply and demand, costs of production and price elasticity all work together.