# Theories about how lack of supply can feed into lack of demand

Are there any economic theories supporting the possibility that lack of economic supply can result in a reduced economic demand?

As an example, let's say a product exists, an electronic product let's say. Due to supply chain shortages, suppose the end product cannot be effectively created in large supply. An example is how coronavirus has impacted the supplychain and thus product manufacturing.

I'm searching for theories that may lead demanders to decide to back away as a result of the lack of supply. Perhaps the unit cost may be the same on the product, but demanders may have more difficultly in finding the product, and realize that there is an additional hassle to obtain said product. This effectively amounts to an additional marginal cost on top of the quoted price on the product.

• If an entity wants to buy something, and cannot find a supplier, it is hard to see how that is a “demand” issue. – Brian Romanchuk Aug 21 '20 at 15:35

Lack of supply of a network good - a good associated with a network effect - may result in lack of demand for that good. The greater the number of people who have or use such a good, the greater its value to any one person. Hence a lack of supply of such a good to some people will probably reduce demand from those to whom it is available. For example, if there were a temporary lack of supply of phone use in city A (eg due to technical connectivity problems) making it impossible for people to make or receive calls, then demand for phone use in other cities might be expected to reduce by the amount of calls that would normally have been made to or from city A. More fundamentally, some goods with the potential to create network effects may never be supplied and used in sufficient quantity to establish such effects, so that demand for them remains minimal (even though it might, if supply had been large enough and other circumstances such as first-mover advantage had been favourable, have become very large).

Possibly not what you had in mind, but if X and Y are complementary goods, then lack of supply of X can result in lack of demand for Y. For example, a shortage of pasta might result in reduced demand for pasta sauces. Or closure of sports centres (eg due to Covid-19) might reduce demand for sports clothing.

• The "...additional hassle.." issue, as stated in the question, is not the same as network externality, though. The network effect on demand from the current supply shock is (perhaps) second order. – Michael Aug 22 '20 at 20:04
• @Michael Agreed, although as I read the question it asks generally about lack of supply leading to lack of demand, and mentions "additional hassle to obtain said product" as just one possible mechanism. – Adam Bailey Aug 23 '20 at 10:35

A simple way to do this is to "qualify" the utility effect of the good by an index of "ease of access". Denote this index $$e(X^s)$$, that we assume depends on the market supply of the good $$X^s$$,

$$0 \leq e(X^s)\leq 1,\;\;\;\partial e/ \partial X^s >0.$$

Assume one good and "all the rest" $$x$$ and $$y$$ respectively. Assume a quasi-linear utility function of the form

$$U(x,y) = y + u(e(x^s)\cdot x),\;\;\; u' >0, u''<0$$

$$s.t,\;\;\; y + p_x\cdot x = I.$$

So if the consumer buys $$1$$ unit of good $$x$$, its utility effect corresponds to the utility effect of a lower quantity, if ease-of-access is not perfect ($$e=1$$). Solving the utility maximization problem, one gets (the value of the Langrange multiplier at the optimum is here equal to unity due to quasi-linearity),

$$e(X^s)\cdot u'(e(X^s)\cdot x) = p_x.$$

For a concrete example, assume that $$u(z) = 2\sqrt{z}$$. Then the first-order condition becomes,

$$\frac{\sqrt{e(X^s)}}{\sqrt{x}} = p_x \implies (x_d)^* = \frac {e(X^s)}{p_x^2}$$

At the optimum, demand depends positively on the "ease of access" index, which in turns depends positively on total market supply. If the latter goes down, $$e(X^s)$$ will also go down, and demand of the individual will go down.

At market level, with $$m$$ identical consumers, market clearing requires

$$X^d = X^s \implies m\cdot \frac {e(X^s)}{p_x^2} = X^s,$$

which is an implicit equation in $$X^s$$.