John Charles, age 14, of Springfield, Ill., for his question:
CAN YOU EXPLAIN SUPPLY AND DEMAND?
In economics, supply and demand are the basic factors that determine prices. According to the theory or law of supply and demand, the market prices of commodities and services are determined by the relationship of supply to demand.
Theoretically, when supply exceeds demand, sellers must lower prices to stimulate sales. Conversely, when demand exceeds supply, buyers bid prices up as they compete to buy goods.
The terms "supply" and "demand" do not mean the amount of goods and services actually sold and bought. In any sale the amount sold is equal to the amount bought, and such supply and demand, therefore, are always equal. In economic theory, supply is the amount available for sale or the amount that sellers are willing to sell at a specified price, and demand, sometimes called effective demand, is the amount purchasers are willing to buy at a specified price.
The theory of supply and demand takes into consideration the influence on prices of such factors as an increase or decrease in the cost of production, but regards that influence as an indirect one, because it affects prices only by causing a change in supply, demand, or both.
Other factors indirectly affecting prices include changes in consumption habits and the restrictive practices of monopolies, trusts and cartels. An example of changes in habits can be seen in a preference shift from natural sick to artificial silk fabrics and garments.
In the view of many economists, the multiplicity of such indirect factors is so great that the terms "supply" and "demand" are, in reality, categories that include economic forces affecting prices, rather than precise, primary causal factors.
The price determining mechanism of supply and demand operates only in economic systems in which competition is largely free from restraints. Increasing recourse in recent times to governmental regulation of the economy has restricted the supply and demand pattern.
Actually, increasing governmental regulation of the economy has tended to hold back the scope of the operation of the supply and demand mechanism. It was greatly restricted in the United States and other countries by the temporary governmental price regulations and rationing during World War II.
In most communist countries, where the economy is planned and controlled by the state, the supply and demand mechanism was initially slated for elimination.
However, beginning in the 1950s in Yugoslavia, in the 1960s in Hungary and the U.S.S.R., in the 1970s in Romania and in the 1980s in China, communist planners have partially restored the role of market forces in their economies.
Because the amount that producers actually sell must be the same as the amount that users actually buy, the only price at which everyone can be satisfied is the one for which supply equals demand. This is called he "equilibrium price."