In viewing demand and supply curves such as those shown in Figure 3-5, beginning economics students often wonder if demand is more important than supply in determining equilibrium price and quantity or if supply is more important than demand. The answer is that demand and supply are equally important. Economist Alfred Marshall (1842-1924) used a vivid analogy to make this point. He likened demand and supply to two blades of a scissors. Which blade of the scissors cuts the paper? To be sure, if the lower blade is held in place and the upper blade is closed down upon it, one could argue that the upper blade has cut the paper. But, would the paper have been cut without the lower blade? And if the upper blade is held in place and the lower blade is closed up against it, would the paper have been cut without the upper blade? The answer to these questions is that it is the interaction of the two blades of the scissors that cuts the paper. Both are necessary and both are important. So it is with demand and supply in competitive markets. Demand (which reflects utility) and supply (which reflects costs) jointly determine equilibrium price and quantity. Without a demand curve, there is no equilibrium price and quantity. But the same is true for supply. Without it, no equilibrium price and quantity exist. Equilibrium price and quantity result from the interaction of demand and supply, and each is equally important.

Photograph courtesy of: (c)Corbis # OOF2073;