Background
Excess demand refers to a scenario in which the quantity of a good demanded surpasses the quantity supplied at a given price. This phenomenon is integral to understanding market dynamics and achieving economic equilibrium.
Historical Context
The concept of excess demand has been a fundamental element of economic thought since the early classical economists. It forms the basis for understanding market adjustments and is core to the study of supply and demand equilibrium.
Definitions and Concepts
Excess demand is defined as the difference between the quantity of a good demanded and the quantity supplied. Positive excess demand indicates that demand exceeds supply, while negative excess demand (or excess supply) implies that supply exceeds demand.
Major Analytical Frameworks
Classical Economics
In classical economics, excess demand is indicative of market imbalances that are self-correcting through price adjustments.
Neoclassical Economics
Neoclassical economics emphasizes that prices adjust to equate demand and supply, thus eliminating excess demand and moving towards equilibrium.
Keynesian Economics
Keynesian economics acknowledges the friction in prices and wages that prevents instant market adjustments, thereby sustaining periods of excess demand or supply.
Marxian Economics
In Marxian economics, excess demand can reflect capitalistic production imbalances and inherent system vulnerabilities, often leading to economic crises.
Institutional Economics
Institutional economics considers the roles of social and legal norms in influencing excess demand conditions, potentially obstructing adjustments to equilibrium.
Behavioral Economics
Behavioral economics examines how psychological factors and biases can lead to persistent excess demand as individuals and firms respond irrationally to prices.
Post-Keynesian Economics
Post-Keynesian economics often emphasizes the role of aggregate demand management in addressing sustained excess demand in the economy.
Austrian Economics
Austrian economics stresses the importance of entrepreneurs and market processes in resolving excess demand through dynamic price systems and market discovery.
Development Economics
Development economics studies the implications of excess demand in emerging markets and proposes strategies to improve infrastructure and production to meet excess demand.
Monetarism
Monetarism asserts that controlling money supply is crucial in managing overall demand, impacting excess demand and thus influencing inflation and output levels.
Comparative Analysis
The comparison between various economic schools reveals diverse approaches to how excess demand is managed and mitigated in achieving market equilibrium.
Case Studies
Case studies examining hyperinflation scenarios, such as the Weimar Republic, illuminate how massive excess demand crises were addressed and what policy tools proved effective or ineffective.
Suggested Books for Further Studies
- “The General Theory of Employment, Interest, and Money” by John Maynard Keynes
- “Capitalism, Socialism, and Democracy” by Joseph A. Schumpeter
- “The Great Transformation” by Karl Polanyi
- “Behavioral Economics: Toward a New Economics by Integration with Traditional Economics” by Angner Erik
- “Man, Economy, and State with Power and Market” by Murray Rothbard
Related Terms with Definitions
- Excess Supply: The condition where the quantity supplied of a good exceeds its quantity demanded at a given price.
- Market Equilibrium: The state in which market supply and demand balance each other, resulting in stable prices.
- Price Adjustment Mechanism: The process through which prices change in response to supply and demand imbalances, aiming to restore equilibrium.
- Walras’s Law: An economic theory stating that the sum of all excess demands across all markets in an economy must equal zero.
- Sonnenschein’s Theorem: A proposition demonstrating that any excess demand function that satisfies Walras’s law can represent an economy’s demand and supply equilibrium.
