I. Supply and Demand
Supply and Demand, in economics, basic factors determining prices. According to the theory, or law, of supply and demand, the market prices of commodities and services are determined by the relationship of supply to demand. Theoretically, when supply exceeds demand, sellers must lower prices to stimulate sales; conversely, when demand exceeds supply, buyers bid prices up as they compete to buy goods. The terms supply and demand do not mean the amount of goods and services actually sold and bought; in any sale the amount sold is equal to the amount bought, and such supply and demand, therefore, always equalizes. In economic theory, supply is the amount available for sale or the amount that sellers are willing to sell at a specified price, and demand, sometimes called effective demand, is the amount purchasers are willing to buy at a specified price.
The theory of supply and demand takes into consideration the influence on prices of such factors as an increase or decrease in the cost of production, but regards that influence as an indirect one, because it affects prices only by causing a change in supply, demand, or both. Other factors indirectly affecting prices include changes in consumption habits (for example, a shift from natural silk to artificial silk fabrics) and the restrictive practices of monopolies, trusts, and cartels. In the view of many economists, the multiplicity of such indirect factors is so great that the terms supply and demand are inclusive categories of economic forces affecting prices, rather than precise, primary causal factors.
The price-determining mechanism of supply and demand is operative only in economic systems in which competition is largely unfettered. Recourse, in recent times, to governmental regulation of the economy has tended to restrict the scope of the operation of the supply-and-demand mechanism. It was greatly restricted in many countries by the temporary governmental price regulations and rationing during World War II. Under Communist systems the planned economy is controlled by the state, the supply-and-demand mechanism being overridden. However, in recent years there has been a remarkable trend towards the reintroduction of market forces in many former planned economies.
II. Black Market
Black Market, term designating the illicit sale of commodities in violation of government rationing and price-fixing. The term originated in Europe during World War I, when the introduction of rationing in belligerent countries tempted some people with access to supplies to enrich themselves by selling unrestricted quantities of rationed items at inflated prices.
Black markets are phenomena of times of crisis or the result of government control of the economy (as in Communist countries). They flourish only when an abnormal scarcity of essential goods may cause a government to impose rationing and price controls as a means of ensuring a more equitable distribution of supplies. At such times certain consumers will pay abnormally high prices to obtain the scarce items, and some profiteers are prepared to take legal and other risks to obtain and sell these items at high prices. Black markets flourished throughout World War II but disappeared after the war as soon as the production of civilian goods returned to normal and government controls were lifted.
Illicit currency exchanges are also sometimes defined as black market operations. These black markets develop when the official exchange rate of a currency is fixed at a level that does not reflect its real exchange value. Such a situation is an incentive for holders of foreign currencies to engage in extralegal currency exchanges rather than to use the less profitable exchanges at official rates.