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.
- The law of supply and demand defines the relationship between the price of a product and people's willingness to either buy or sell it.
- John Locke, Sir James Steuart, Adam Smith, Alfred Marshall, and Ibn Taymiyyah are early thinkers credited with first discussing the law of supply and demand.
- Alfred Marshall expanded on the theory of supply and demand with his concept of price elasticity of demand, which examines how price changes affect demand.
The law of supply and demand defines the relationship between the price of a given good or product and the willingness of people to either buy or sell it. Generally, as the price of a good increases, people are willing to supply more and demand less.
Philosopher John Locke is credited with one of the earliest written descriptions of this economic principle in his 1691 publication, Some Considerations of 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."
However, Locke did not actually use the term "supply and demand." Its first appearance in print came in 1767, from Sir James Steuart.
Sir James Steuart
Sir James Steuart's Inquiry into the Principles of Political Economy, published in 1796, was the first known printed use of the term "supply and demand." 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 significantly decreased, 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.
Often referred to as the Father of Economics, Smith explained the concept of supply and demand as an "invisible hand" that naturally guides the economy. According to Smith, the invisible hand is the automatic pricing and distribution mechanisms in the economy. Smith described a society in which bakers and butchers provide products that individuals need and want, providing a supply that meets demand and developing an economy that benefits everyone.
It is important to note that Smith's ideas haven't gone without critique over the years since his ideas were first published, though. Over time, his ideas have been added to in order to represent the changing times and include concepts such as marginal utility, comparative advantage, entrepreneurship, the time-preference theory of interest, and monetary theory.
Additionally, Smith didn't properly explain pricing or a theory of value and failed to see the importance of the entrepreneur in breaking up inefficiencies and creating new markets.
After Smith's 1776 publication, the field of economics developed rapidly, and the law of supply and demand was refined. 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.
Though these theorists are the figures frequently mentioned when discussing the origin of the law of supply and demand, other scholars across the world also contributed to its development.
For example, Islamic scholar Ibn Taymiyyah, who died 300 years before Locke's aforementioned publication, has recorded writings about the law of supply and demand, though he didn't use those exact terms. He discussed how prices are determined by demand and supply and not by the unjust actions of people involved in the transaction.
The Bottom Line
Despite the origins of the law of supply and demand beginning hundreds of years ago, it's still a topic frequently referenced and utilized today in economic theory and discussions. The theory has developed over time to accommodate recent technological and economical advancements, but the basic ideas of the theory remain largely the same.
Who coined the phrase "the law of supply and demand"?
Though Sir James Steuart was the first to use the phrase "supply and demand" in his 1796 publication, Inquiry into the Principles of Political Economy, many other scholars and thinkers are credit with discussing the origins of the theory, such as Adam Smith, John Locke, Alfred Marshall, and Ibn Taymiyyah.
How does supply and demand work?
The law of supply and demand is a theory that explains the interaction between the sellers of a resource and the buyers of that resource. Generally, as price increases, people are willing to supply more and demand less and vice versa when the price falls.
What is an example of supply and demand?
Let's say a company has a large supply of houseplants and sets the price of each at $20. If it isn't selling well due to low demand, the price may be lowered. If more people start buying the plant at the lower price (meaning the demand has increased), the price may increase as the supply of the plants decreases.