The Economics Book

110

S

upply and demand are

among the fundamental

building blocks of economic

theory. The interplay between the

amount of a product available on

the market and the eagerness of

consumers to buy that product

creates the foundation of markets.

The importance of supply and

demand in economic relationships

was studied as long ago as the

Middle Ages. The medieval

Scottish scholar Duns Scotus

recognized that a price must be fair

to the consumer but must also take

into account the costs incurred in

production and therefore be fair

to the producer. Subsequent

economists studied the effects

of supply-side costs on eventual

prices, and economists such as

Adam Smith (p.61) and David

Ricardo (p.84) linked the price of a

product to the labor required in

its production. This is called the

classical labor theory of value.

In the 1860s new economic

theories began to develop,

challenging these ideas under the

banner of the neoclassical school.

This school of thought introduced

the theory of marginal utility

(pp.114–15), where the satisfaction

a consumer gains or loses from

having more or less of a product

affects both demand and price.

British economist Alfred

Marshall joined the analysis of

supply with the new neoclassical

approach to demand. Marshall saw

that supply and demand work in

tandem to generate the market

price. His work was important

because he illustrated the varying

dynamics of supply and demand

SUPPLY AND DEMAND

IN CONTEXT

FOCUS

Theories of value

KEY THINKER

Alfred Marshall (1842–1924)

BEFORE

c.1300 Islamic scholar

Ibn Taymiyyah publishes a

study of the effects of supply

and demand on prices.

1691 English philosopher John

Locke argues that commodity

prices are directly influenced

by the ratio of buyers to sellers.

1817 British economist David

Ricardo argues that prices are

influenced mainly by the cost

of production.

1874 French economist Léon

Walras studies the equilibrium

(balance) in markets.

AFTER

1936 British economist

John Maynard Keynes

identifies economy-wide total

demand and supply.

Alfred Marshall Born in London, England, in 1842,

Alfred Marshall grew up in the

borough of Clapham before going

to Cambridge University on a

scholarship. There, he studied

mathematics and then

metaphysics, concentrating on

ethics. His studies led him to see

economics as a practical means of

implementing his ethical beliefs.

In 1868, Marshall took up a

lectureship specially created for

him in moral science. His interest

in this continued until a visit to

the US in 1875 made him focus

more on political economy.

Marshall married Mary Paley, his

former student, in 1877 and

became principal of University

College, Bristol, UK. In 1885,

he returned to Cambridge as

professor of political economy, a

post he held until his retirement

in 1908. From about 1890 until

his death in 1924, Marshall was

considered the dominant figure

in British economics.

Key works

1879 The Economics of Industry

(with Mary Paley Marshall)

1890 Principles of Economics

1919 Industry and Trade

0

PRICE

QUANTITY

Quantity at

equilibrium

Price at equilibrium

Supply

Equilibrium

Demand

This graph, known as the Marshallian

Cross, shows the relationship between

supply and demand. The point at

which the supply and demand curves

intersect gives the price.