# The Law of Supply and Demand: Part II

> A series of essays based on portions of Objective Economics: How Ayn Rand’s Philosophy Changes Everything About Economics by Northrup Buechner. In my previous posting on this subject, I noted that both the proponents and opponents of the law of…
> URL: https://capitalismmagazine.com/2012/02/the-law-of-supply-and-demand-part-ii/
> Last modified: 2016-02-19T08:01:39+00:00

*A series of essays based on portions of **[Objective Economics: How Ayn Rand’s Philosophy Changes Everything About Economics](http://www.amazon.com/gp/product/0761854819/ref=as_li_qf_sp_asin_il_tl?ie=UTF8&tag=amz06-20&linkCode=as2&camp=1789&creative=9325&creativeASIN=0761854819) by Northrup Buechner.*

In my previous posting on this subject, I noted that both the  proponents and opponents of the law of supply and demand agree that it  is a restraint on the power of the state. “Exactly what is this law on  whose import both its friends and its enemies agree?” I asked. What does  the law of supply and demand say? This is the first step in my answer.

When the layman or noneconomist invokes the law, he thinks the law  means that prices are set by supply and demand, and he thinks of supply  and demand as facts of economic reality. So far, this is correct. It is  because supply and demand are facts of the economy that the law cannot  be violated with impunity. In this respect, supply and demand do not  differ from any other facts. Pretty much everyone understands that facts  cannot be ignored or rejected without negative consequences.

Economists’ interpretation of the law of supply and demand differs  from that of the noneconomist. Economists interpret the law to mean that  the market price of every good (for example, toasters) is set so that  the quantity demanded always equals the quantity supplied. Thus, every  consumer is able to buy all the toasters he wants to buy and every  producer is able to sell all the toasters he wants to sell. The problem  with this interpretation is that, while it is true of toasters, it is  not true of many things.

The most important exception is the market for workers and employees.  Clearly, the wage for every kind and type of worker is not set so that  every worker can find a job the way he can buy a toaster. Workers  routinely spend weeks, months and sometimes years looking for jobs.  Hotel rooms are another exception; hotels do not sell every room every  night. Also, there are always houses for sale in the market for new and  used housing. and there is always commercial office space available to  rent in that market. The standard estimate of the average vacancy rate  in rental apartments is five percent. In all these cases, it is unusual  for the quantity supplied ever to equal the quantity demanded.

Now consider these common cases: Retail establishments, such as  drugstores, shoe stores, grocery stores, clothing stores, and so forth,  typically have large stocks of goods on their shelves, which is the  supply they offer for sale. Each month, that supply consists of the  store’s inventory at the beginning of the month plus whatever additions  the store makes to inventory during the month—the total of which greatly  exceeds monthly sales (the demand). Retail service outlets, such as  nail salons, restaurants, barber shops, and so forth, usually have the  ability to serve many more customers than they do. By their nature,  retail businesses almost always have an excess of supply over demand.

Finally, utilities such as electric power and phone companies, always  maintain excess capacity in order to meet peak load demand.

In light of these facts, I reject the interpretation of the law of  supply and demand as meaning that the supply is always equal to the  demand. But if the supply is not always equal to the demand, what does  the law of supply and demand mean? I will take that up in Part III of  this series.

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