The time for introducing a fresh group of students to supply and demand is soon to be upon us. In a spirit of sympathy and support, here us some background on three images used by prominent economists about supply and demand: the scissors, the banana, and the parrot.
Alfred Marshall made this point elegantly in his 1890 Principles of Economics, where he famously analogized supply and demand to the two blades of a pair of scissors. He wrote:
We might as reasonably dispute whether it is the upper or the under blade of a pair of scissors that cuts a piece of paper, as whether value is governed by utility or cost of production. It is true that when one blade is held still, and the cutting is effected by moving the other, we may say with careless brevity that the cutting is done by the second; but the statement is not strictly accurate, and is to be excused only so long as it claims to be merely a popular and not a strictly scientific account of what happens.
Another common question for students is to ask where prices come from in a market economy. I\’ve never found an explanation more crisp and straightforward than this one from Joan Robinson (from the
It is not easy to explain what the analysis of value is, without making it appear extremely mysterious and extremely foolish. The point may be put like this: You see two men, one of whom is giving a banana to the other, and is taking a penny from him. You ask, How is it that a banana costs a penny rather than any other sum? The most obvious line of attack on this question os to break it up into two fresh questions: How does it happen that the one many will take a penny for a banana? and: How does it happen that the other man will give a penny for a banana? In short, the natural thing is to divide up the problem under two heads: Supply and Demand.
If a modern business man is asked what determines the rate of interest, he may usually be expected to answer, \”the supply and demand of loanable money.\” But \”supply and demand\” is a phrase which has been too often forced into service to cover up difficult problems. Even economists have been prone to employ it to describe economic causation which they could not unravel. It was once wittily remarked of the early writers on economic problems: \”Catch a parrot and teach him to say `supply and demand,\’ and you have an excellent economist.\” Prices, wages, rent, interest, and profits were thought to be fully \”explained\” by this glib phrase. It is true that every ratio of exchange is due to the resultant of causes operating on the buyer and seller, and we may classify these as \”demand\” and \”supply.\” But this fact does not relieve us of the necessity of examining specifically the two sets of causes, including utility in its effect on demand, and cost in its effect on supply. Consequently, when we say that the rate of interest is due to the supply and demand of \”capital\” or of \”money\” or of \”loans,\” we are very far from having an adequate explanation.