Supply and Demand - An Extract from the Tyrants Handbook of Economics

We will start off with a few easy-to-understand concepts by looking at supply and demand. This should more accurately be termed demand and supply because supply very rarely precedes demand except in the case of taxation where when the government sees a supply of money and then demands a piece of it.

One authority has proclaimed that a shift in supply occurs simultaneously with a shift in demand. This leads to the inflationary spiral or wage-price spiral.

Indeed it is the demand or anticipated demand that causes an increase in supply. The converse is surely impossible; increasing supply cannot increase demand unless of course the price of the supply dropped.

Furthermore, it is difficult to see how an increase in supply and demand can effect the inflationary spiral. Inflation surely is caused by increasing the money supply. If the rise in demand was equal to the increase in supply surely the price would remain unchanged. Only if the demand exceeded the supply would the price rise.

In any case, a rise in a particular price on its own cannot cause inflation (only an increase in the supply of money can) but it will cause an adjustment of relative prices - some prices rising and some falling. These are the kinds of controversies with which economics deals and it is necessary to think very clearly, step by step, about causes and consequences.

Most university students who study economics learn the traditional theories off by heart and have very little real understanding of the dynamics involved. It is important that the reader of this little book, be they university students or Ministers of Finance, should fully understand the principles and processes involved. Economics is a fascinating subject but it needs to be read, studied and inwardly digested.

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