Joint And Composite Demand. Joint And Composite Supply

§ 1. Bread satisfies man’s wants directly.

The demand for it is said to be direct. But a flour mill and an oven satisfy wants only indirectly, by helping to make bread, etc., and the demand for them is said to be indirect.

More generally: The demand for raw materials and other means of production is indirect and is derived from the direct demand for those directly serviceable products which they help to produce.

The services of the flour mill and the oven are joined together in the ultimate product, bread: the demand for them is therefore called a joint demand. Again, hops and malt are complementary to one another; and are joined together in the common destination of ale: and so on. Thus the demand for each of several complementary things is derived from the services which they jointly render in the production of some ultimate product, as for instance a loaf of bread, a cask of ale. In other words there is a joint demand for the services which any of these things render in helping to produce a thing which satisfies wants directly and for which there is therefore a direct demand: the direct demand for the finished product is in effect split up into many derived demands for the things used in producing it.

To take another illustration, the direct demand for houses gives rise to a joint demand for the labour of all the various building trades, and for bricks, stone, wood, etc. which are factors of production of building work of all kinds, or as we may say for shortness, of new houses. The demand for any one of these, as for instance the labour of plasterers, is only an indirect or derived demand.

Let us pursue this last illustration with reference to a class of events that are of frequent occurrence in the labour market; the period over which the disturbance extends being short, and the causes of which we have to take account as readjusting demand and supply being only such as are able to operate within that short period. This case has important practical bearings, which give it a special claim on our attention; but we should notice that, referring as it does to short periods, it is an exception to our general rule of selecting illustrations in this and the neighbouring chapters from cases in which there is time enough for the full long-period action of the forces of supply to be developed.

Let us then suppose that the supply and demand for building being in equilibrium, there is a strike on the part of one group of workers, say the plasterers, or that there is some other disturbance to the supply of plasterers’ labour. In order to isolate and make a separate study of the demand for that factor, we suppose firstly that the general conditions of the demand for new houses remain unchanged (that is, that the demand schedule for new houses remains valid); and secondly we assume that there is no change in the general conditions of supply of the other factors, two of which are of course the business faculties and the business organizations of the master builders; (that is, we assume that their lists of supply prices also remain valid).

Then a temporary check to the supply of plasterers’ labour will cause a proportionate check to the amount of building: the demand price for the diminished number of houses will be a little higher than before; and the supply prices for the other factors of production will not be greater than before47 . Thus new houses can now be sold at prices which exceed by a good margin the sum of the prices at which these other requisites for the production of houses can be bought; and that margin gives the limit to the possible rise of the price that will be offered for plasterers’ labour, on the supposition that plasterers’ labour is indispensable. The different amounts of this margin, corresponding to different checks to the supply of plasterers’ labour, are governed by the general rule that:— The price that will be offered for any thing used in producing a commodity is, for each separate amount for the commodity, limited by the excess of the price at which that amount of the commodity can find purchasers, over the sum of the prices at which the corresponding supplies of the other things needed for making it will be forthcoming.

To use technical terms, the demand schedule for any factor of production of a commodity can be derived from that for the commodity by subtracting from the demand price of each separate amount of the commodity the sum of the supply prices for corresponding amounts of the other factors48 .

§ 2. When however we come to apply this theory to the actual conditions of life, it will be important to remember that if the supply of one factor is disturbed, the supply of others is likely to be disturbed also. In particular, when the factor of which the supply is disturbed is one class of labour, as that of the plasterers, the employers’ earnings generally act as a buffer.

That is to say, the loss falls in the first instance on them; but by discharging some of their workmen and lowering the wages of others, they ultimately distribute a great part of it among the other factors of production. The details of the process by which this is effected are various, and depend on the action of trade combinations, on the higgling and bargaining of the market, and on other causes with which we are not just at present concerned.

Let us inquire what are the conditions, under which a check to the supply of a thing that is wanted not for direct use, but as a factor of production of some commodity, may cause a very great rise in its price. The first condition is that the factor itself should be essential, or nearly essential to the production of the commodity, no good substitute being available at a moderate price.

The second condition is that the commodity in the production of which it is a necessary factor, should be one for which the demand is stiff and inelastic; so that a check to its supply will cause consumers to offer a much increased price for it rather than go without it; and this of course includes the condition that no good substitutes for the commodity are available at a price but little higher than its equilibrium price. If the check to house building raises the price of houses very much, builders, anxious to secure the exceptional profits, will bid against one another for such plasterers’ labour as there is in the market.

The third condition is that only a small part of the expenses of production of the commodity should consist of the price of this factor. Since the plasterer’s wages are but a small part of the total expenses of building a house, a rise of even 50 per cent. in them would add but a very small percentage to the expenses of production of a house and would check demand but little.

The fourth condition is that even a small check to the amount demanded should cause a considerable fall in the supply prices of other factors of production; as that will increase the margin available for paying a high price for this one51 . If, for instance, bricklayers and other classes of workmen, or the employers themselves cannot easily find other things to do, and cannot afford to remain idle, they may be willing to work for much lower earnings than before, and this will increase the margin available for paying higher wages to plasterers. These four conditions are independent, and the effects of the last three are cumulative.

The rise in plasterers’ wages would be checked if it were possible either to avoid the use of plaster, or to get the work done tolerably well and at a moderate price by people outside the plasterers’ trade: the tyranny, which one factor of production of a commodity might in some cases exercise over the other factors through the action of derived demand, is tempered by the principle of substitution52 . Again, an increased difficulty in obtaining one of the factors of a finished commodity can often be met by modifying the character of the finished product. Some plasterers' labour may be indispensable; but people are often in doubt how much plaster work it is worth while to have in their houses, and if there is a rise in its price they will have less of it. The intensity of the satisfaction of which they would be deprived if they had a little less of it, is its marginal utility; the price which they are just willing to pay in order to have it, is the true demand price for plasterers’ work up to the amount which is being used.

So again there is a joint demand for malt and hops in ale. But their proportions can be varied. A higher price can be got for an ale which differs from others only in containing more hops; and this excess price represents the demand for hops53 . The relations between plasterers, bricklayers, etc., are representative of much that is both instructive and romantic in the history of alliances and conflicts between trades- unions in allied trades. But the most numerous instances of joint demand are those of the demand for a raw material and the operatives who work it up; as for instance cotton or jute or iron or copper, and those who work up these several materials. Again, the relative prices of different articles of food vary a good deal with the supply of skilled cooks’ labour: thus for instance many kinds of meat and many parts of vegetables which are almost valueless in America, where skilled cooks are rare and expensive, have a good value in France, where the art of cooking is widely diffused.