In 2 different comments on the same post https://www.dailykos.com/stories/2021/11/16/2064546/-Sorry-But-It-s-Time-To-Stop-Flying?utm_campaign=trending Tuesday, I saw “Supply and Demand” be used to justify ridiculous statements of hypotheticals which neither have any relationship to reality nor to the actual supply-demand hypothesis as it is taught in economics classes.
Let’s be clear. The hypothesis is an approximation of how prices (and volume of production/consumption) are set. Sometimes, it is a close approximation; sometimes, it strays fairly far. However far it strays, it isn’t fair to misrepresent it.
The idea is based on 2 curves.
The supply curve, /, represents a graph of how much is produced, on the vertical axis and the cost of production on the horizontal axis. Some return on investment is included in the cost.
The demand curve, \, represents the amount of the product which customers will buy at a particular price on the vertical axis and that price on the horizontal axis.
The theoretical framework assumes actual curves, but the keyboard doesn’t provide them.
The hypothesis has only a few assumptions.
- The price and volume of sales are determined by the intersection of the supply curve and the demand curve. (Price = cost.)
- Supply curves are always positively sloped. (Where actual transactions are occurring, it costs more per unit to produce more units.)
- Demand curves are always negatively sloped. (If the price is lower, customers will buy more.)
- The longer the time, the flatter the curve. (I’m not going to deal with this.)
Now, what economists mean by greater demand is a different demand curve. (Instead of this one, /, that one, /.) So, if demand falls, the demand curve shifts to the left (and the supply curve presumably stays in the same place). In that case, the price and the volume both drop.
(This was what the commenters didn’t see.)
If there are various plants producing the product at various efficiencies, you can see how the drop in production would make the production cost per unit lower. Most supply curves are positively sloped. [If fewer than a plane-load of people fly from Chicago to Fargo, you can see how the drop in passengers would make the cost per passenger higher. Not all supply curves are positively sloped.]