The Evolution of the Law of Supply and Demand: Insights from 1691 to 2025

The law of supply and demand, a cornerstone in economics, explains how the availability and desire for a product influence its price. Although formally named later, this principle has been observed in markets for centuries, evolving through the insights of key thinkers.

This law describes the dynamic between a product’s price and the willingness of consumers and producers to buy or sell it. Typically, when prices rise, suppliers are motivated to offer more, while consumers tend to purchase less, and vice versa.

Key Highlights

• The law illustrates how product prices adjust based on buyer and seller behaviors.
• Early contributors include John Locke, Sir James Steuart, Adam Smith, Alfred Marshall, and Ibn Taymiyyah.
• Alfred Marshall introduced the concept of price elasticity, analyzing how demand responds to price changes.

John Locke’s Early Perspective (1691)

Philosopher John Locke provided one of the earliest written accounts of supply and demand principles in his 1691 work, Some Considerations of the Consequences of the Lowering of Interest and the Raising of the Value of Money. He argued that market forces, rather than government intervention, should regulate interest rates, emphasizing that prices fluctuate according to the number of buyers and sellers.

Locke’s insights laid groundwork, though he did not coin the term “supply and demand.”

Sir James Steuart’s Formal Coinage (1767)

In 1767, Sir James Steuart first used the phrase “supply and demand” in his publication Inquiry into the Principles of Political Economy. Steuart highlighted how excess supply lowers prices, impacting merchants’ profits and employment levels.

Adam Smith and the Invisible Hand (1776)

Often hailed as the Father of Economics, Adam Smith extensively discussed supply and demand in his 1776 masterpiece, The Wealth of Nations. He introduced the concept of the “invisible hand,” describing how self-interested individuals in markets naturally balance supply and demand to benefit society.

While influential, Smith’s theories have been expanded to include concepts like marginal utility, comparative advantage, and entrepreneurship, addressing some of his original limitations.

Alfred Marshall’s Refinements (1890)

Alfred Marshall advanced economic theory with his 1890 book Principles of Economics, introducing the supply and demand curve to illustrate market equilibrium. He also developed the idea of price elasticity of demand, showing that some goods, such as essential medicines, have inelastic demand where price changes minimally affect consumption.

Ibn Taymiyyah’s Early Contributions

Long before European economists, Islamic scholar Ibn Taymiyyah (died 1328) discussed principles akin to supply and demand. He emphasized that prices are determined by market forces rather than unfair practices, highlighting a global and historical dimension to the theory.

Who Coined “The Law of Supply and Demand”?

While Sir James Steuart first introduced the term in print, many thinkers including Locke, Smith, Marshall, and Ibn Taymiyyah contributed foundational ideas shaping the law of supply and demand.

How Does Supply and Demand Function?

This economic law explains interactions between sellers and buyers. As prices rise, suppliers are incentivized to increase supply, while buyers reduce demand. Conversely, lower prices encourage more demand and less supply.

Example in Practice

Imagine a company selling houseplants at $20 each. If sales slow due to low demand, prices may drop to attract buyers. Increased demand at lower prices can then raise prices again as available supply diminishes.

Conclusion

Originating centuries ago, the law of supply and demand remains vital in understanding economic behavior. Though refined over time to incorporate modern complexities, its core principles continue to guide market dynamics in 2024 and beyond.

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