Is there a cause and effect relationship between supply and demand?

My answer would be “sometimes,” either unidirectionally or bidirectionally in our modern environments.

If there is pent up aggregate demand for a good that is known - i.e. has existed and fulfilled a particular utility for some time - then a new player could decide to begin producing that good, or an existing player could increase their production, or either could find ways to reduce prices on that good…all in order to meet pent up demand. This happens quite frequently in fact, and represents a unidirectional causal relationship between demand→supply. A common example of this would be established communities where there is no inexpensive housing, or that lack any grocery stores or gas stations within a convenient distance, or that only have access to one really pricy ISP. Another example would be a vast array of goods and services after a prolonged economic downturn.

There may also be what I would call “unconscious” pent up aggregate demand for a newly discovered or introduced good. A culture that has never been exposed to something that is commonly produced somewhere else - alcoholic beverages, coffee, silk fabrics, cigarettes, eyeglasses, etc - may quickly ramp up demand once exposed to that good. Likewise, a new service or product that satisfies some basic human need that isn’t being thoroughly provided for in existing society (or has been difficult to access) - such as pornography, social media, spiritual nourishment, for example - may create a boom of commoditization and consumption, and their responsive supply.

If someone invents a new good and exerts tremendous marketing effort to persuade people that they have a need (even if they didn’t before), then they may successfully create artificial aggregate demand. This also happens quite frequently, and represents a unidirectional causal relationship between supply → demand. An example of this would be pharmaceuticals marketed directly to consumers, especially where the efficacy of the drug is questionable, or the symptoms or condition are much less common than are being represented by advertising. Now of course it’s the marketing that stimulates artificial demand - not the supply alone - but in this case many such drugs just didn’t compete well with others for a given treatment, so the companies try to recover their R&D investment by gaining approval to treat conditions unrelated to their initial objective. In other words, without this preexisting supply there would be no marketing, so the causal chain remains intact.

Now I think it is important to note that these different scenarios can exist in both for profit and nonprofit environments, and among both privatized and socialized goods and services.

Where things get more interesting (to me at least) are situations that foster bidirectional causality, where a feedback loop amplifies both demand and supply. This occurs not infrequently in financial and information economies. For example, when psychological momentum builds around a speculative opportunity - such as high tech companies that could, perhaps, produce something that people want, but actually don’t produce anything at the moment (or haven’t made any profit producing what they do). And suddenly the demand for stock in these companies skyrockets - and stock values skyrocket along with that, which stimulates a boom of high tech companies entering the market that could, potentially, meet a demand that could, potentially, exist. But all of this is just make-believe. There is nothing there but a psychological demand-supply feedback loop.

It is also important to note that neither supply nor demand are the end of the causal chain. There are often many other factors in play - things like cultural capital, habituation and addiction, shareholder pressure to increase profits, macroeconomic events, etc. But if you use “supply” and “demand” as aggregate representations of economic function, then you can delve into other factors as subordinate or superior causes and effects.

My 2 cents.

From Quora post:


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