LAW OF DEMAND AND LAW OF SUPPLY
ALLAMA IQBAL EXPLAINS
(Translated from Urdu Ill-mul-Iqtisad)
By: Abbas Ali
……………..For the sake of convenience, let’s explain the law of demand first, then the law of supply, and then, combing their explanations, we will establish a comprehensive law. Demand refers to the specific quantity of a commodity that will be bought at a specific price. In this definition, we have assumed that the purchaser of this quantity really has the ability to pay for it. Obviously, demand and want cannot be taken to be the same.
Because every person desires to have everything, even if he does not have the ability to pay for a particular commodity, in addition, in the above definition, the words “specific price” are also important. Because of a change in the price of a commodity, a change in the quantity demanded of the commodity is also required. With the help of the law of demand, we can explain how the change in the quantity demanded of a commodity is related to the change in its price. In other words, when the price of a commodity decreases, the quantity demanded increases, whereas when the price increases, the quantity demanded decreases (Subject to the condition that the purchasing power of money and the quantity of money in the buyer’s possession remain constant).
We have stated that, subject to the condition that the purchasing power of money and the quantity of money in the possession of the buyers remain constant, the fulfilment of this condition is mandatory because, as the income resources of a person grow, or, in other words, as a person becomes wealthier, so will his ability to buy goods at higher prices. And as his resources of income decrease or as the income which he possesses decreases, so will his ability to buy decrease. If in the first case he could buy a commodity at Rs 10/=, then in the second case he would not be able to buy it even at Rs 5/=. Even if the need remains the same in both cases, therefore, this law can be stated briefly as follows: the quantity demanded of a commodity increases due to a fall in price and decreases due to a rise in price. For example, if the price of umbrellas increases, many of the buyers who used to use umbrellas will now abandon their use. And only those people will buy umbrellas who can afford to pay the increased price. Therefore, the quantity demanded for umbrellas will fall. If there is a fall in the price of umbrellas, then many people who could not use them earlier will now be able to buy and use them. Therefore, the quantity demanded for umbrellas will rise.
Similarly, supply refers to that particular quantity of a good that is offered for sale at a particular price. The law of supply can be stated in common language as follows: as the price goes on rising, the goods to be sold have the tendency to rise (Subject to the condition that the purchasing power of money and the quantity of money in the possession of the buyers remain constant). When a commodity fetches a higher price, every producer will spend his capital in the production of that commodity, and if a commodity fetches a lesser price, no producer will spend his capital in the production of that commodity. Therefore, in the first case, the quantity demanded will rise, and in the second case, it will fall.
Now, pondering both the laws, it will be known that because between the two there is a contradiction, for the purpose of the exchange of goods, it is necessary to create a balance between demand and supply; otherwise, exchange will be impossible. And if exchange is impossible, then how will the value be determined? Therefore, under the influence of different economic effects, a balance is automatically created between the demand for and supply of commodities, which can be established as a law: in every market, the price of goods is determined by the balance between the quantity demanded and the quantity supplied. If demand is higher and supply is lower, the price of the commodities will rise above normal. Similarly, if demand is lower and supply is higher, the price will be lower than normal. Therefore, for the determination of the ultimate price of goods (the meaning of this term will be explained), it is necessary that there be a balance between demand and supply, implying that demand for goods is equal to the supply of goods.
To explain the meaning of this law more clearly, let us take the example of an imaginary island. Suppose there are one thousand farmers on the island. Suppose further that they need fertilizer for their fields, and every farmer is ready to pay ten measures of grain in exchange for five trucks of fertilizer. According to this calculation, five thousand trucks will be demanded, the price of which is two measures per truck.
But it is possible that at the mentioned price, the supply of fertilizers will be more than or less than five thousand trucks. Some people will consider fishing more profitable than selling fertilizer at that price. In this way, if the farmers do not pay more, the supply of fertilizer will be absolutely nil, and if there is any supply at all, it will be meager and will be distributed among them all. However, if some farmers are ready to pay more because of the increase in price, the people who had opted to fish will leave and start supplying fertilizer, thereby increasing the supply of fertilizer. On the contrary, if, due to some natural cause, the supply of the fertilizer increases, then until its demand does not increase equal to its supply, all the fertilizer sellers will compete with one another to lower its price. Because all of them would want to sell their stock as soon as possible. Naturally, everyone will think about his benefit, no matter if it causes a loss to another person…………….
Ilm-ul-Iqtisad
Part-3 Chapter-1
Baab Awal “Masl-e-Qadir”
