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Demand and Supply

Demand is a key concept in both macroeconomics and microeconomics. In the former, consumption is mainly a function of income; whereas in the latter, consumption or demand is primarily, but not exclusively, a function of price. This analysis of demand relates to microeconomic theory.

The law of demand was discovered by A.A. Cowrnot (1801 – 1877), a professor of mathematics at the University of Lyons, France, and it was he who drew the first demand curve in the 1830s.

The first practical application of demand theory, by Jules Dupuit (1804 – 1866), a French engineer and economist, was the calculation of benefits from building a bridge and, given that a bridge had been built, of the correct toll to charge for its use. The law of demand and supply and the connection between the cost of production and supply were first worked out by D. Lardner (1793 – 1859), an Irish professor of philosophy at the University of London.

Current theory rests on the foundations laid by Marshall (1890), Edgeworth (1881), and Pareto (1896). Marshall viewed demand in a cardinal context, in which utility could be quantified. Most contemporary economists hold the approach taken by Edgeworth and Pareto, in which demand has only ordinal characteristics and in which indifference or preferences become central to the analysis.

Much economic analysis focuses on the relation between prices and quantities demanded, the other variables being provisionally held constant. At the various prices that could prevail in a market during some period of time, different quantities of a good or service would be bought. Demand, then, is considered as a list of prices and quantities, with one quantity for each possible price. With price on the vertical axis and quantity on the horizontal axis, the demand curve slopes downward from left to right, signifying that smaller quantities are bought at higher prices and larger quantities are bought at lower prices. The inverse relation between price and quantity is usually called the law of demand.

The law rests on two foundations. One is the theory of the consumer, the logic of which shows that the consumer responds to lower prices by buying more. The other foundation is empirical, with innumerable studies of demand in actual markets having demonstrated the existence of downward-sloping demand curves.

Exceptions to the law of demand are the curiosa of theorists. The best-known exception is the Giffen effect - a consumer buys more, not less, of a commodity at higher prices when a negative income effect dominates over the substitution effect.

Another is the Veblen effect - some commodities are theoretically wanted solely for their higher prices. The higher these prices are, the more the use of such commodities fulfills the requirements of conspicuous consumption, and thus the stronger the demand for them.

Supply and demand are the two sides of each market transaction. Supply is the quantity of a good sellers wish to sell at each conceivable price. The higher the price of something, the more of it will be offered for sale – and vice versa. The supply curve shows the relation between price and quantity supplied, holding other things constant. The market supply curve can be viewed as the horizontal summation of the supply curves of all the firms producing the product.

Vocabulary notes

the demand curve кривая спроса

the laws of demand and supply законы спроса и предложения

benefit прибыль, выгода, польза

utility общественная полезность

the supply curve кривая предложения

conceivable price возможная цена

actual markets фактически существующие рынки

conspicuous consumption потребление напоказ

market transaction рыночная сделка


I. Translate from Russian into English

потребление, в основном, кривая спроса, расчет прибыли, количественный, качественный, предпочтения и маловажность, современный, постоянный, переменные, доминировать на рынке, ось, нисходящая кривая, закон спроса, бесчисленный, исключение, эффект замещения, выполнять требования, потребление напоказ

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