So far, I’ve focused mainly on the producers and consumers of goods. But supply and demand can apply anywhere: from labor, to loans, to even dating. Any situation that involves voluntary exchanges can be thought of in terms of supply and demand.
Let’s look at a labor market for example.
Labor supply is determined by how much pay workers are willing to sell their labor for.
Labor demand is determined by how much employers are willing to pay their workers.
Shifts in labor supply can be caused by changes in the enjoyment, stability or purpose of the job.
Shifts in labor demand depends on how labor productivity changes, i.e. changes in the education level and skills of the average worker, or changes in the productive possibilities of labor-supplementing machines.
Because loans are a typical part of capital investments, economists worry a lot about markets for loanable funds.
Here, we have interest rate on the y-axis, because interest is the price lenders want in exchange for their loans.
The loanable funds supply curve is determined by how much interest lenders want for their loans.
The demand curve is determined by how much interest borrowers are willing to pay for those loans.
Shifts in the supply curve are caused by changes in the risk of loans. If lenders expect a recession (making it harder for borrowers to pay money back), if they expect inflation (making the money paid back worth less), or if there are changes in the tax code that act against lenders, then the supply curve will shift left. In opposite scenarios, it shifts right.
Shifts in the demand curve are caused by changes in the risks of the loans as well (except from the perspective of the borrower). Expecting a boon in the economy (making it easier to pay back the loan), expecting inflation (making the money now worth more than later) and changes in the tax code that benefit borrowers, will all shift the demand curve to the right. In opposite scenarios, it shifts left.
Remember: the ultimate interest rate and quantity of loans is determined by both, supply and demand.
Say you’re an avid Zac Toa fan. You’ve read through his site, you bought all his books, and you refuse to spend time with anybody who doesn’t know who he is. (I think that’s a bad mentality to have since you can’t tell the unwashed masses about Zac Toa if you avoid them, but if that’s just the way you are, it’s okay. I forgive you.)
Anyway, you decide that for anybody to date you, they have to purchase a number of my books. The more books they purchased, the more hours you’ll commit to dating them. This is your main criterion for whether or not a person should be dated.
Meanwhile, the person dating you is an idiot who doesn’t like reading my stuff. But because the person loves you, the person decides that they’re willing to buy my books in exchange for dating hours with you. Here’s the catch: the more books this idiot has to buy, the less date hours the person will want with you… So you can’t force the person to buy all my books. :[
Your supply and demand curves look like that. Simple, right?
But unfortunately, there are external factors besides the number of Zac Toa books purchased that will shift your respective supply and demand curves. For example, if the person is rich, popular, healthy and/or nice to you, your supply curve for them is likely to shift right. If you’re rich, popular, healthy and/or nice to them, their demand curve for you is likely to shift right. Price is one factor that motivates our behaviors; but it’s not the only factor.
I gave you the tools you need to analyze any set of free exchanges in our economy. I deserve a reward. Go buy my books.
As always, thanks for reading,
Zac Toa
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