Supply & Demand

Though fairly annoying to admit, the real world’s global economy does boil down to supply and demand. Remember how quickly you wanted to forget your economics classes? Not to worry, this site’s research isn’t going to rehash Econ 101.

Bottom line, the world is filled with unlimited wants and demands, and a limited amount of resources and supply.

How this interplay of supply servicing demand works is the perennial question of economics. Will this limited supply be allocated by the free market, prices, and individual action, or will it be allocated by planned, centralized governing boards?

Below is the only time we’re going to show this, but we do need to look at two graphs of supply and demand:

Small disclaimer. You could draw eight basic supply and demand charts related to above. Adding further complication, you can look at the concept of ‘supply elasticity,’ which could change each supply curve a further five ways, and you could look at the concept of ‘demand elasticity,’ which can change each demand curve yet another five ways.

Again, we’re not going to rehash Econ 101.

This research does contend, however, that the interplay between the two charts above is one of the most crucial, as it encompasses one specific principle—monopoly.

Before you read on to that section, however, let’s break down what’s happening above. The first chart on the left is the most basic of supply and demand curves. It is showing the interplay between a supply curve of some (any) good’s quantity, and a demand curve of some (any) good’s quantity. That is the x-axis. Where those two lines intersect is the quantity where demand meets supply. Then your eyes should be drawn to the y-axis. That is the price needed to ‘clear’ the market. This is the price where the market is in equilibrium, and the economy is functioning at optimal capacity.

Mountains, mountains, and mountains of paper have been scribbled on covering this topic. Economists look at goods, at money, at credit, at incomes, at spending, at preferences, at unemployment, at taxes, and try to ‘steer’ their ideas into the minds of politicians, which in turn try to ‘steer’ the economy into a more efficient and ‘optimal’ capacity.

That’s the idea.

As you may imagine, the author views all of this as quite rhetorical.

In any event, let’s hold off on how the real world operates, and look at the second chart. In this chart, the supply in the market (for any good, for any reason) increases. It shifts to the right. Now we’ll introduce a crucial principle in economics—ceteris paribus. All else equal. Let’s simply assume that, all else equal, the quantity demanded for that good does not change.

As you can see, you get a shift to the right in the quantity supplied on the x-axis, but notice you also get a shift downward on the y-axis toward a new equilibrium price. What does that downward shift mean? It means that the price falls. Therefore, we can economically say (and you can say this many ways):

Ceteris paribus, an increase in a good’s quantity supplied to the market will always result in a price decrease for that good.

That’s it.

Now you may be thinking, what about the six other charts you could draw, compounded with all the different ‘elastic’ (sloped) supply and demand curves you could infer as well?

This research doesn’t even intend to go that far.

There are many reasons for this, which will continuously be clarified. But essentially, we will focus solely on money as a good, and how money interplays with government planning.

Money. Money is a generally accepted medium of exchange. That’s its x-factor, compared with any other economic good. No doubt its two other typical features, ‘unit of account’ and ‘store of value,’ also play a vital role. But it’s x-factor is the fact that money is a medium of exchange. It means money is crucially important in any economic transaction, as it will generally be accepted. As the great Ron Paul always said, how could money not be important when it’s one-half of every transaction?

So immediately, let’s analyze money in the context of the above two charts. Money, again, behaves like any other good in the economy. It will, to be sure, behave the same way here.

Money has historically been ‘supplied’ to any market in two ways. The first is by mining it in a decentralized manner, either historically by mining gold or silver, or even today by ‘mining’ bitcoins.

The other method, which has been fully entrenched in the modern world since 1971 (though certainly existed in many different forms in the past), is when the government, or the State, takes control of the supply of money, and ‘mints it’ or ‘issues it’ on its own. This means it restricts any other free competition in the market, limiting the supply of money to (typically) one firm. As we’ve alluded to, this is called monopoly.

Supply and demand, applied to Money. So when you look at the above supply and demand curves again, and you want to overlay these curves within the context of money, it should be clear that the quantity supplied comes either from mining and minting it in the market, or issuing it from the government. Today, legally, all over the world (and these are called ‘legal tender’ laws), money is only supplied to the market by the government, from its licensed arm called the central bank. It is supplied by monopoly.

Now for demand. Though all demands are theoretically (as mentioned above) unlimited, it is well true that in practice, in the real world, we all have a ‘limited’ demand for all goods, even money. Think you really have an unlimited demand for 100-dollar bills? Alright, where would you store them? How would you manage your security? Even Pablo Escobar, who was literally swimming in hard cash, had trouble with this concept, and ended up just burying millions of units of the stuff, some of it never to be found until well after he was gone.

In any event, let’s revisit our axiom from above: Ceteris paribus, an increase in a good’s quantity supplied to the market will always result in a price decrease for that good.

So let’s focus on the right chart, and rather than hash it out, let’s state the conclusions:

  1. Money is crucially important in any transaction;
  2. Though important, money works like any other economic good;
  3. The government supplies the market with money today;
  4. The government does this via monopoly (no one else can compete);
  5. If the government increases the supply of money, then ceteris paribus, the price of money will decrease.

Let’s explain the ‘price of money decreasing’ part. What does that mean? Does it mean the prices of goods fall in terms of that money? Other goods get cheaper? No. It’s precisely the opposite. Other goods become more expensive. We just need to be consistent to understand this. Don’t lose the plot here, it’s not that hard, and the supply and demand axioms work exactly the same, just as with any other good.

A decrease in the ‘price of money’ means that the money itself falls in value (the price of it, as a good, falls). So this actually means that all other economic goods become more expensive, in terms of that money.

Another way of saying this is the ‘purchasing power’ of said money decreases.

These are the effects of an increase in the money supply, in a ceteris paribus world.

We are not yet at the point here to run wild with all the potential and real-world scenarios on how this increase in the money supply actually plays out vis-à-vis prices, or how it relates to (definite) increases in ‘demand’ for said money over time. Certainly, the real world does not exist in the micro vacuum that our above supply and demand curves encapsulate. Ceteris paribus is never true in the real world.

But as far as the economic concepts above are concerned, they are all true and corporeal, and this is precisely the avenues this research will explore.

Supply and demand. Focused on money. Focused on the money supply.

How does it all actually play out, when observing the real world?

Final disclaimer. Money… is not credit. These two things are closely related to be sure, but they are not the same. As always, Bitcoin will clarify everything here. If money is a good, it will have a price. What is that price? With bitcoins, this answer has always been incredibly simple: it is… its price! Anyone who has ever remotely paid attention to Bitcoin has seen a market ‘price’ for bitcoins in one way or another on their TV screen, on their phone, or even (yes even) in their newspaper. This is the ‘price’ of a bitcoin, the ‘price’ of money. What is another name for this? The ‘economic’ name? It is simply called the exchange rate.

Yet when we take our minds back to fiat money, for some strange reason, even economists so often like to say that the price of money is the ‘interest rate.’ This is flat out wrong. The interest rate is the price of credit, full stop.

The exchange rate and the interest rate almost certainly influence each other, but they are not the same.

As is typically the case, Bitcoin makes everything easy. The price of money is the exchange rate.