The law of supply and demand, which dictates that a product's availability and demand impacts its price, was noticed in the marketplace long before it was mentioned in a published work. Philosopher John Locke is credited with one of the earliest descriptions of this economic principle in his 1691 publication of "Some Considerations on the Consequences of the Lowering of Interest and the Raising of the Value of Money."

Locke did not actually use the term "supply and demand," which first appeared in print in 1767 in Sir James Steuart's "Inquiry into the Principles of Political Economy." Adam Smith dealt extensively with the topic in his 1776 epic work, "The Wealth of Nations."

John Locke

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

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

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.

Alfred Marshall

After Smith's 1776 publication, the field of economics developed rapidly. In 1890, Alfred Marshall wrote "Principles of Economics," where he explained how supply and demand, costs of production and price elasticity work together. Marshall developed the 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 that 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, that consumers deem crucial to daily life.

  1. Is demand or supply more important to the economy?

    Learn more about the impact of supply and demand in an economy. Find out why companies study supply and demand as part of ... Read Answer >>
  2. What is the difference between price inelasticity and inelasticity of demand?

    Learn how supply, demand and pricing are interrelated by studying the concepts used by economists to measure pricing fluctuations. Read Answer >>
  3. What are some examples of inelastic goods and services that are not affected by the ...

    Find out how the laws of supply and demand function for goods and services considered highly inelastic, including goods not ... Read Answer >>
  4. How Does the Law of Supply and Demand Affect Prices?

    Learn how the law of supply and demand affects prices, as when one outweighs the other, prices can rise or fall in response. Read Answer >>
  5. What's the difference between regular supply and demand and aggregate supply and ...

    Understand how businesses use supply and demand and aggregate supply and demand to forecast economic activity. Learn about ... Read Answer >>
Related Articles
  1. Insights

    Adam Smith and "The Wealth Of Nations"

    Adam Smith's 1776 classic "Wealth of Nations" may have had the largest global impact on economic thought.
  2. Insights

    Economics Basics

    Learn economics principles such as the relationship of supply and demand, elasticity, utility, and more!
  3. Insights

    Why We Splurge When Times Are Good

    The concept of elasticity of demand is part of every purchase you make. Find out how it works.
  4. Insights

    The Marshall Plan and the Revitalization of Post War Europe

    The Marshall Plan helped revive the economies of Western Europe after WWII largely by reforms that created greater economic cooperation in the region.
  5. Insights

    The History of Economic Thought

    Economics is a vital part of every day life. Discover the major players who shaped its development.
  6. Insights

    How Demand Changes With a Variation in Price

    What is demand elasticity?
  7. Insights

    What Is Elasticity?

    Elasticity measures the relationship between a good and its price based on consumer demand, consumer income, and its available supply. Learn the basics about it here.
  1. Demand Theory

    Demand theory is a principle relating to the relationship between ...
  2. Demand Elasticity/Elasticity of Demand

    In economics, the demand elasticity (elasticity of demand) refers ...
  3. Inelastic

    Inelastic is a term used to describe the unchanging quantity ...
  4. Tax Incidence

    A tax incidence is an economic term for the division of a tax ...
  5. Marshall Plan

    The Marshall plan was the U.S.-sponsored program implemented ...
  6. Labor Market

    The labor market refers to the supply and demand for labor in ...
Hot Definitions
  1. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  2. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  3. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  4. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  5. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  6. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
Trading Center