CHAPTER II

THE GENERAL LAWS OF SUPPLY AND DEMAND

Sec.1. Preliminary Statement of Three Laws.  The recognition of order in any branch of natural phenomena is but the prelude to the formulation of a set of laws, the simpler as the order is more universal, which describe, and as we say, explain it.  Thus the perception of the even, elliptical courses of the heavenly bodies led to the statement of the law of gravitation and the laws of motion.

In economics, similar laws have long since been enunciated, and have proved themselves such valuable instruments for the understanding of the daily problems of the workaday world, that they have been woven into the texture of our ordinary speech and thought.  I have already touched upon them in the preceding chapter.  But it is now desirable to set them out in order, in the most concise and formal manner possible.

LAW I. When, at the price ruling, demand exceeds supply, the price
   tends to rise.  Conversely when supply exceeds demand the price
   tends to fall.

LAW II.  A rise in price tends, sooner or later, to decrease demand and
   to increase supply.  Conversely a fall in price tends, sooner or
   later, to increase demand and to decrease supply.

LAW III.  Price tends to the level at which demand is equal to supply.

These three laws are the cornerstone of economic theory.  They are the framework into which all analysis of special, detailed problems must be fitted.  Their scope is very wide.  I have purposely refrained from introducing into my statement of them any reference to commodities; for they extend far beyond commodities.  Subject to an important qualification, they apply to capital, the price paid for the use of capital being what we call the rate of interest.  They apply hardly less to “services,” to the remuneration of labor of every kind and grade.  People sometimes protest warmly against the idea of treating labor “like a commodity.”  If this indignation expresses no more than a belief that in matters concerning conditions of work, and relations between employees and the management, the sensibilities of human nature should be taken into due account, it is based on elementary decency and commonsense.  But if, as sometimes appears, it is directed against the fact that the remuneration of labor is controlled by the laws of supply and demand, it is a mere baying at the moon, with singularly little provocation.  For these laws are in no way peculiar to commodities, and it is no one’s fault that they include commodities too within their scope.