Supply And Demand

In economics, “Demand” is not just a psychological desire. It is the quantity of a well-defined good that people are willing and able to buy, in a given set of circumstances.

If consumers are clamouring for Ferraris, and are prepared to pay up to £30,000 for them, but they cost £50,000, there is no demand for Ferraris.

If I really want a hovercar, there is no demand for hovercars. Even if Professor Frink discovers how to build a hovercar, there is still no demand for hovercars, until they are built and put on sale.

We’d all like to own cool and fun stuff. But there is no demand for cool and fun stuff. The term is too vague to have any meaning.

This is very basic economics. It therefore beggars belief that otherwise articulate people can assert that there is excess demand for a good that does not exist, or excess demand for a good that people are not willing to pay for (see comments). Economics is about people making choices, not about their vague desires, which are the province of psychology, sociology, and other related disciplines.

Going back to the Robinson Crusoe and Friday example, Friday is NOT contributing to the demand for rum, because he is not willing to pay for it, at current prices. There is no demand for “the kind of flowers Robinson Crusoe would actually like” because that term is too vague. If we somehow discover that Robinson likes white roses (say), there is still no demand for white roses, because there aren’t any around. It’s only when Friday finds some flowers that Robinson likes and offers them to him that we can talk about there being demand for them.

Finally, a general glut is when there is long-term overcapacity in all sectors i.e. there is high and persistent underutilisation of resources and labour in all sectors of the economy. On our island, this is exactly what is taking place – Robinson and Friday are both working half-days because demand has collapsed for their output. What has happened is that there has been a dislocation in the flower industry, which has made the flower workers less able to spend, which has caused a sharp fall in aggregate demand, which has made the glut general.


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