DEMAND AND SUPPLY are terms used in political economy to express the relations between consumption and pro duction—between the demand of pur chasers and the supply of commodities by those who have them to sell. The rela tions between the demand for an article and its supply determine its price or ex changeable value [VanirE]: the relations between the demand for labour and its supply determine the amount of wages to be earned by the labourer [WAGES]. For causes explained elsewhere, the price of an article will rarely vary, for any length of time, very much above or below its cost bf production ;t nor will the wages of labour, for any length of time, much ex ceed or fall below the amount necessary to maintain labourers and their families in such comforts as their habits of life have accustomed them to believe neces sary for their subsistence ; but bearing in mind that, in the prices of commodities and labour, there is a certain point, de termined by causes independent of de mand or supply, above or below which prices cannot materially vary for any considerable time : all variations of price, if the medium in which they are calcu lated remains unchanged, may be referred to the proportion which exists between the demand for commodities and the sup ply of them—between the quantities which purchasers are willing and able to buy, and the quantities which producers are able and willing to sell.
To have any influence upon prices a demand must be accompanied by the means of purchasing. A demand is not simply a want—a desire to obtain and enjoy the products of other men's labour; for if this were its meaning, there would never be the least proportion between de mand and supply : all men would always want everything, and production could not keep pace with consumption. But an "effective demand," as it is termed by • Adam Smith, exists wherever one man is anxious to exchange the products of his own labour for that of other men. It is, therefore, of an effective demand only that political economists are speaking when they examine the circumstances of demand and supply in connexion with prices.
But although a demand, without the means of purchase, cannot affect prices, the universal desire of mankind to pos sess articles of comfort and luxury sug gests other important considerations. As this desire is natural to man, and too often is so strong as to tempt him even to commit crime, it obviously needs no encourage ment; men will always gratify it when ever they have the means, and these means consist in the products of their own la bour. Hence all that is required to con
vert this desire of acquisition into an effective demand is ample employment for industry. Increase the production of all commodities and an increased consump tion of them is the certain result ; for, men having larger products of their own la bour to offer in exchange for the products of other men's labour, are enabled to pur chase what they are always eager to ace quire. Production, therefore, is the great object to be secured, not only as furnish ing a supply of commodities necessary and useful to mankind, but also as creat ing an effective demand for them. When trade is depressed by a languid demand, it is commonly said that increased con sumption is all that is required to restore its prosperity. But how is this consump tion to be caused ? The desire to con sume is invariable, and thus any falling off in consumption must be attributed to a diminished production in some depart ments of industry which causes an inabi lity to consume. When production is re stored, an effective demand for all articles will immediately follow ; but until the productive energies of the consumers are in a state of activity it is in vain to ex pect from them an increased demand.
These considerations lead us to the conclusion that a universal glut of all commodities is impossible. The supply of particular commodities may easily ex ceed the demand for them, and very often does exceed it ; but as the constant desire to obtain commodities needs nothing but the power of offering other commodities in exchange, to become an effective de mand, it is evident that a universal in crease of production is necessarily accom panied by a proportionate increase of con sumption. Men are stimulated by no love of production for its own sake, but they produce in order to consume directly, or because by exchanging their produce with others they are able to enjoy the various comforts and luxuries which they are all desirous of obtaining. Active production, therefore, in all departments of industry causes a general and effective demand for commodities, which will continue to be equal to the supply unless it be checked by war, by restrictions upon commerce, or by other circumstances which prevent a free interchange of commodities.