Equilibrium Of Normal Demand And Supply

§ 1. Supply prices are prices which dealers are willing to accept. What governs supply prices?*

The last chapter looked at the affairs of 1 day.

It supposed the stocks for sale already existed.

But some stocks, like crops, are still not available.

Even in the corn-exchange of a country town on a market-day the equilibrium price is affected by calculations of the future relations of production and consumption; while in the leading corn-markets of America and Europe dealings for future delivery already predominate and are rapidly weaving into one web all the leading threads of trade in corn throughout the whole world.

Some of these dealings in “futures” are but incidents in speculative manœuvres; but in the main they are governed by calculations of the world’s consumption on the one hand, and of the existing stocks and coming harvests in the Northern and Southern hemispheres on the other.

Dealers take account of the areas sown with each kind of grain, of the forwardness and weight of the crops, of the supply of things which can be used as substitutes for grain, and of the things for which grain can be used as a substitute.

Thus, when buying or selling barley, they take account of the supplies of such things as sugar, which can be used as substitutes for it in brewing, and again of all the various feeding stuffs, a scarcity of which might raise the value of barley for consumption on the farm. If it is thought that the growers of any kind of grain in any part of the world have been losing money, and are likely to sow a less area for a future harvest; it is argued that prices are likely to rise as soon as that harvest comes into sight, and its shortness is manifest to all. Anticipations of that rise exercise an influence on present sales for future delivery, and that in its turn influences cash prices; so that these prices are indirectly affected by estimates of the expenses of producing further supplies.

But in this and the following chapters we are specially concerned with movements of price ranging over still longer periods than those for which the most far-sighted dealers in futures generally make their reckoning: we have to consider the volume of production adjusting itself to the conditions of the market, and the normal price being thus determined at the position of stable equilibrium of normal demand and normal supply.

§ 2. In this discussion we shall have to make frequent use of the terms cost and expenses of production; and some provisional account of them must be given before proceeding further.

We may revert to the analogy between the supply price and the demand price of a commodity.

Assuming for the moment that the efficiency of production depends solely upon the exertions of the workers, we saw that “the price required to call forth the exertion necessary for producing any given amount of a commodity may be called the supply price for that amount, with reference of course to a given unit of time10 .”

But now we have to take account of the fact that the production of a commodity generally requires many different kinds of labour and the use of capital in many forms.

The exertions of all the different kinds of labour that are directly or indirectly involved in making it; together with the abstinences or rather the waitings required for saving the capital used in making it: all these efforts and sacrifices together will be called the real cost of production of the commodity.

The sums of money that have to be paid for these efforts and sacrifices will be called either its money cost of production, or, for shortness, its expenses of production; they are the prices which have to be paid in order to call forth an adequate supply of the efforts and waitings that are required for making it; or, in other words, they are its supply price11 .

The analysis of the expenses of production of a commodity might be carried backward to any length; but it is seldom worth while to go back very far. It is for instance often sufficient to take the supply prices of the different kinds of raw materials used in any manufacture as ultimate facts, without analysing these supply prices into the several elements of which they are composed; otherwise indeed the analysis would never end. We may then arrange the things that are required for making a commodity into whatever groups are convenient, and call them its factors of production. Its expenses of production when any given amount of it is produced are thus the supply prices of the corresponding quantities of its factors of production. And the sum of these is the supply price of that amount of the commodity.

§ 3. The typical modern market is often regarded as that in which manufacturers sell goods to wholesale dealers at prices into which but few trading expenses enter. But taking a broader view, we may consider that the supply price of a commodity is the price at which it will be delivered for sale to that group of persons whose demand for it we are considering; or, in other words, in the market which we have in view.

On the character of that market will depend how many trading expenses have to be reckoned to make up the supply price12 . For instance, the supply price of wood in the neighbourhood of Canadian forests often consists almost exclusively of the price of the labour of lumber men: but the supply price of the same wood in the wholesale London market consists in a large measure of freights; while its supply price to a small retail buyer in an English country town is more than half made up of the charges of the railways and middlemen who have brought what he wants to his doors, and keep a stock of it ready for him. Again, the supply price of a certain kind of labour may for some purposes be divided up into the expenses of rearing, of general education and of special trade education. The possible combinations are numberless; and though each may have incidents of its own which will require separate treatment in the complete solution of any problem connected with it, yet all such incidents may be ignored, so far as the general reasonings of this Book are concerned.

In calculating the expenses of production of a commodity we must take account of the fact that changes in the amounts produced are likely, even when there is no new invention, to be accompanied by changes in the relative quantities of its several factors of production. For instance, when the scale of production increases, horse or steam power is likely to be substituted for manual labour; materials are likely to be brought from a greater distance and in greater quantities, thus increasing those expenses of production which correspond to the work of carriers, middlemen and traders of all kinds.

As far as the knowledge and business enterprise of the producers reach, they in each case choose those factors of production which are best for their purpose; the sum of the supply prices of those factors which are used is, as a rule, less than the sum of the supply prices of any other set of factors which could be substituted for them; and whenever it appears to the producers that this is not the case, they will, as a rule, set to work to substitute the less expensive method. And further on we shall see how in a somewhat similar way society substitutes one undertaker for another who is less efficient in proportion to his charges. We may call this, for convenience of reference, The principle of substitution. The applications of this principle extend over almost every field of economic inquiry13 .