offer and demand

Recognizing that supply and demand dominate prices has been one of the key messages in economics since the book by Adam Smith, An Inquiry Into the Nature and Causes of the Wealth of Nations in 1776. After that, supply and demand have been presented for generations with the following chart:

Fig.: classic supply and demand function

 (Source: own illustration)

 
This model is based on many small suppliers and many small buyers. The increase in volume at higher prices is achieved by the fact that then more suppliers (according to the idea of Smith, for example, small craftsmen) manufacture these goods. These assumptions are no longer in the ordinary range today. The mechanism still works a little bit, but mostly not as described by Adam Smith.
 
Smith distinguished the market price, formed by supply and demand, from the natural price, which coincides with the average cost (wage, land rent and profit). The market value fluctuates around the natural value, but in the long run can not move far away from it. Under the conditions of industrial production with a few large suppliers, this means that with increased demand and larger quantities produced, the unit costs decrease due to the effect of fixed cost degression, as shown in the following graph:

Fig.: cost function

 (Source: own illustration)

 
Now, if you assume that demand will increase linearly with falling prices and the natural price declines with costs, then the following supply and demand function will occur:
 

Fig.: Supply-demand function in the oligopoly

(Source: own illustration)

 
The function would not have one, but two intersections. A demand below the first intersection, referred to here as the flop limit, will not cover the costs of the vendors. This product would not be offered. The intersection of supply and demand comparable to classic graphics would be second. But this would probably only be achieved under the conditions of a price war, if stronger suppliers with lower costs wanted to oust a competitor from the market. More often, however, they are likely to seek a profit maximum at which they would achieve even high profits and the weaker competitors low profits. Under these conditions, the market price would therefore be well above the natural price. The market would only start to move if additional large foreign suppliers wanted to penetrate the domestic market. However, under the conditions of a globalized world market, this possibility has already been taken into account. But then often no longer supply and demand regulate the price.
 
This mechanism is the reason that illegal price fixing is becoming more frequent. (See eg http://www.wiwo.de/unternehmen/industrie/pflanzenschutzmittel-und-pflastersteine-die-spektakulaersten-kartellfaelle/4645552.html or http://www.diewunderbareweltderwirtschaft.de/p/illegale-preisabsprachen-wurstkartell.html) Because of the legitimacy of the supply-demand function in the oligopoly, the antitrust regulator is fighting against windmills.
 
The mechanism of supply and demand also does not work for everyday goods, where the quantity demanded depends only slightly on the price demanded. Such as. The decline in milk prices shows that consumers are not motivated by the lower prices to drink more milk. With rising prices, they would only slightly limit their consumption. The demand is inelastic, so it hardly reacts to the price.
 

Fig.: Supply-demand function with inelastic demand

 (Source: own illustration)

 
The market economy functions here only through the mechanism that the smallest farmers should be forced to the operating task. In order to get out of the danger zone, however, many medium-sized farmers have expanded their business to lower fixed costs with fixed-cost degression, thus increasing the oversupply of milk and aggravating the problem. Because supply and demand will not produce a satisfactory result, politicians try to mitigate the need with subsidies - as problem solving the plans of the politicians can not be described.
 
Another example where supply and demand would produce unsatisfactory results is the labor market. Not only is this market not elastic, it is even elastic. Here, with a sinking price for the worker, not less, but more manpower would be offered. Because workers would no longer be able to earn a living for their families with declining wages, they would have to seek a part-time job. Not only the demand, the supply also rises with falling wages. The world economic crisis from 1929 has impressively shown that market-based solutions have aggravated rather than solved the problem. Only on the assumption that demand rises more than supply, it will eventually come to a balance between the offered and the demanded worker with a very strong drop in wage levels.
 

Fig.: Supply-demand function in the labor market

 (Source: own illustration)

 
Because supply and demand in the labor market are working poorly, workers have organized cartels through unions to prevent falling wages. In order not to undermine these cartels, there must also be flanking social protection for the unemployed.
 
The presented constraints on the function of supply and demand as in the textbook show that Adam Smith's theory under today's conditions describes the exceptional case rather than the normal case. The companies have adjusted to it.