I have added this entry to this blog's glossary, it being a myth within neoclassical economics.
The image of two intersecting curves — one sloping down for demand, one sloping up for supply — is perhaps the most famous in economics. It is presented as the key to understanding all markets. Yet this tidy diagram bears little resemblance to the messy, dynamic world we inhabit.
Assumption
The theory suggests that when prices rise, buyers want less of whatever is on offer, while sellers want more. The market, therefore, finds an equilibrium price at which the two meet. Everything, from wages to food prices, is supposedly explained by this simple balancing act. The diagram gives the illusion of universal truth and mathematical elegance.
Reality
In real life, demand does not always fall as price rises. People often buy expensive goods precisely because they are expensive. Luxury brands, property in fashionable postcodes, or speculative assets like Bitcoin are all of this type. Economists call these Veblen goods or Giffen goods, but they are not exceptions; they are central features of modern economies built on status and scarcity.
On the supply side, things are no simpler. Production cannot adjust instantly. A farmer cannot grow new crops overnight because demand rises; a factory cannot double capacity without investment.
In labour markets, supply is shaped by contracts, health, family responsibilities and the sheer need to survive. What is more, people cannot simply supply more labour when wages fall; they may instead drop out of work altogether.
Why It Matters
When policymakers treat these curves as literal descriptions of behaviour, they misdiagnose problems. Inflation, for example, is often blamed on too much demand when supply bottlenecks, corporate profiteering, or external shocks such as energy prices are really driving it.
Central banks raise interest rates to cool demand, punishing households instead of tackling the real sources of cost pressure.
The curves also hide power: employers and landlords can often dictate terms regardless of supposed equilibrium. These curves ignore the realities of political economy.
Understanding this means recognising that markets are not natural balancing systems but arenas of negotiation, regulation and struggle.
Summary
Supply and demand curves are teaching tools, not truths, and real markets rarely obey their geometry. This economic myth does not extend beyond the classroom, but its implications have, at a cost to us all.
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I remember Len Goodman (the dancer) telling a story about his childhood helping on his grandfather’s market stall. One day he saw his grandfather pouring apples from a box into two compartments on the stall, one labelled ‘Selected’ and with a higher price. Len asked why, since the apples were in fact all the same. His grandfather replied ‘You’ll see’ – and sure enough it was the more expensive apples that sold first.
This was in a street market in East London around 1950, so I’m not sure it was all about conspicuous consumption – more simply that people believe ‘you get what you pay for’, despite the evidence that in fact you don’t.
🙂
When doing my MBA – shown these curves – thought they were nonesense then (= zero connection with real world) and still do now. & yet they still feature in text books.
Electrical engineering course: right chaps, for the purposes of this session – we will assume that power cables have no resistance ……………
🙂
My Grandson has just started University and has his first essay on Non Price determinants of Demand. Looking at his text book you get the argument that these are exceptions that prove the rule, instead of the “Law of S&D” being the exception . There are then pages of mathematical equations with lots of numbers and letters so it must be true!!!!. When did Supply and Demand need complicated maths, its meant to be a simple model??
Economics is now just lousy maths. It has nothing to do with economics. Those who can’t teach maths now teach economics.
Funny, isn’t it, how all these unrealistic assumptions have the same rich-friendly ideological slant.
OK Mr Economist………..
If prices fall then am I ABLE to consume more food/coffee/petrol/paddle steamer trips/whatever?
At the margins I might be able to consume a little more or ‘trade up’ to even more frou frou coffee but even if its cheaper it doesnt mean either that I CAN consume more and of course it doesnt make the experience of driving long distances any more pleasurable or the mechanics of getting a 9am departure from Tower Pier any simpler.
🙂
Demand and supply curves follow the logic of marginal analysis and elasticity. We are assuming that prices and quantities are infinitely divisible. Market store traders work in whole units and preferable just bank notes. The same thing happens at actions, prices go up in steps and there is never a smooth line.
But economists aren’t interested in reality.
I have a debt of gratitude to Steve Keen in ‘Debunking Economics’ about this issue.
There is not A demand and supply curve.
There ARE demand and supply curves – lots of them for and within sectors – that cannot be summed up neatly in just one.
Another example of Neo-liberal reduction-ism’s departure from reality.
Agreed