Reality Gets in the Way: The Trouble with Demand Curves

mises.org / Frank Shostak / August 26, 2016

One of the few things economists agree on is that prices are determined by supply and demand. This is summarized by means of supply and demand curves, which describe the relationship between the prices and the quantity of goods supplied and demanded.

Within the framework of supply-demand curves an increase in the price of a good is associated with a fall in the quantity demanded and an increase in the quantity supplied. Conversely, a decline in the price of a good is associated with an increase in the quantity demanded and in a decline in the quantity supplied. In short, the law of supply is depicted by an upward-sloping curve while the law of demand is presented by a downward-sloping curve.

The equilibrium price is established at the point where the two curves intersect. At this point, the quantity supplied and the quantity demanded is equal — at the equilibrium price the market is said to “clear.”

Graphs vs. Reality

In the conventional supply-demand framework, consumers and producers confront a given price; that is, at a given price, consumers demand and producers supply a certain quantity of a good. Demand is not a particular quantity, such as 10 potatoes, but rather a full description of the quantity of potatoes the buyer would purchase at each and every price that might be charged. Likewise, supply is not a particular quantity but a complete description of the quantity that sellers would like to sell at each and every possible price. At a given price, people will demand a certain quantity of a good while producers will supply a certain quantity.

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