Chapter 32 Chapter 3 The Equilibrium of Normal Demand and Normal Supply

Section 1. Almost all transactions in indestructible commodities are affected by estimates of the future. Next we must inquire what causes determine the supply-prices, that is to say, those prices which the sellers are willing to accept for the various quantities. In the last chapter we considered only one day's transactions; exist. These quantities depend, of course, on the quantity of corn sown the preceding year, and this depends largely on the farmers' guesses as to the price of corn they will get during the current year.This is what we will focus on in this chapter. Even in a town's corn exchange on the market day, equilibrium prices are affected by those estimates of the future relationship between production and consumption.In the major grain markets in Europe and the United States, futures trading has taken the lead and quickly linked the main routes of grain trade around the world. Some of the "futures" buying and selling are purely speculative; but they are largely determined by estimates of world consumption on the one hand, and estimates of present quantities and future harvests in the northern and southern hemispheres on the other.The merchants have in mind the acreage of the various kinds of corn, the early maturity and yield of the crops, the supply of those which serve as substitutes for corn, and the supply of those for which corn can be a substitute for them.For example, in buying and selling barley, they have to consider the supply of things like sugar, which can be used as a substitute for barley in the brewing industry, and also the supply of various fodder, because the lack of fodder will raise the farm. The value of the barley used.If, in any part of the world, the growers of a certain grain are supposed to have been at a loss, and the future acreage of that corn must be reduced; it may be inferred that the price of that corn must rise, since its scarcity is so obvious.Expectations of rising prices have an effect on the advance sales of futures, which in turn affect current prices; these prices are thus indirectly affected by estimates of the production costs of future supplies.

But in this and the following chapters we shall be dealing especially with price movements during periods longer than the most far-sighted futures trader can generally foresee.We must consider the quantity of production which adapts itself to market conditions and the normal price determined by the stable equilibrium position of normal demand and normal supply. Section II Actual Cost of Production and Money Cost Production Expenses.factor of production. In this discussion we shall have to use frequently the terms cost of production and expense of production; and before proceeding further we must give a brief account of these terms.

We can reiterate the analogy between the supply price of a good and its demand price.In assuming that the efficiency of production is entirely dependent on the effort of the worker, we have seen that "the price required to induce the effort necessary to produce any given quantity of a commodity may be called that quantity (of course referring to a given unit of time supply price for the quantity within ).But we must now consider the fact that the production of a commodity generally requires many different kinds of labor and uses capital in various forms.The different kinds of labor employed directly or indirectly in the production of commodities, and the waiting required for abstinence or saving the capital employed in the production of commodities; The amount of money which must be paid for the sacrifice is called the money cost of the production of the commodity, or, for simplicity, the cost of production of the commodity.The cost of production is the price that must be paid to elicit an adequate supply of the labor and sacrifices required to produce the commodity; in other words, the cost of production is the supply price of the commodity.

The analysis of the costs of production of commodities goes back very far, but it is not worth doing; for example, taking as last facts the supply prices of the various raw materials used in any Several ingredients consisting of the above are often enough.Otherwise our analysis may never end. We may divide the things required for the production of a commodity into as many kinds as is convenient, and call them the factors of production of the commodity.Thus, when any given quantity of a commodity is produced, its cost of production is the supply-price of the corresponding quantity of its factors of production.The sum of these supply prices is the supply price for that quantity of the commodity.

The third section is the principle of substitution. A typical modern market is often regarded as one in which manufacturers sell their goods to wholesalers at prices in which there are few commercial costs.But viewed more broadly, we consider the supply price of a commodity to be the price at which it will be sold to the group of persons we are considering who want it, that is to say, the price in the market we are considering.As to how much of the supply price is the expense of commerce, it depends on the nature of the market.For example, the supply price of lumber in the vicinity of Canadian forests tends to consist almost entirely of the price of the lumberjack's labor.But a great part of the supply price of the same wood in the London wholesale market is freight; and more than half its supply price to an odd buyer in an English town is rail freight and bringing what he wants to his door with the stock of the same. Fees charged by the middlemen who grew the timber for him to buy.In addition, the supply price of a certain kind of labor can be divided into education expenses, general education expenses and specialized education expenses for some reason.The possible combinations are innumerable; and though each combination may have its own branches, which would require separate treatment in the thorough solution of any problem connected with it, all such Generally speaking, it can be ignored.

In calculating the cost of production of a commodity, we must take account of the fact that even in the absence of new inventions, changes in the output of the commodity easily lead to variations in the relative quantities of the several factors of production of the commodity.For example, if the scale of production is large, it is likely to use horsepower or steam engines to replace manual labor.The raw materials, mostly from distant lands, are brought in large quantities, adding to the costs of production equal to the wages of the porters and the charges of various middlemen and merchants.

To the best of their knowledge and economic power, the producers will in each case choose those factors of production which are most suitable for their use.The sum of the supply prices of the factors of production employed is generally less than the sum of the supply prices of any other group of factors of production which could be substituted for them; and whenever producers find that this is not the case, they generally try to Substitute the method that costs less.We shall later see how society, in much the same way, substitutes one entrepreneur for another, because the latter is less efficient in terms of the price he charges society.For ease of reference, we may call it the principle of substitution.

This principle can be applied in almost every field of economic research. Section IV discusses the production costs of a representative firm. Our starting point is this: we examine the equilibrium of normal demand and normal supply in their most general form; we leave aside those peculiarities peculiar to particular branches of economic science, and focus our attention on of those general relations.We assume, therefore, that demand and supply act freely; that neither buyers nor sellers are closely associated, each acting independently, and that there is a large degree of free competition; that is, buyers are generally free compete with buyers freely, and sellers generally freely compete with sellers.Although each acts alone, we assume that he generally knows enough of what the others are doing to keep him from underpaying or paying more than others.Suppose for the moment that this applies to finished products of every kind and their factors of production, to the employment of labor and the lending of capital.To what extent these assumptions correspond to real life has been studied to some extent, and will be further studied.But at present we start from this assumption; we assume that there is only one price in the market at a time; There are differences in freight charges among the hands of traders in different parts of the market; and if it is a retail market, we have to account for the special charges of retail business.

In this market there is a demand price for various quantities of a commodity, that is to say, a price at which every given quantity of the commodity will find a buyer in a day, a week, or a year.And the circumstances which govern the price of any given quantity of the commodity vary in character from case to case; but in each case the more that is offered for sale in a market, the price at which buyers are about to be found. In other words, the demanded price per bushel of corn or yard of cloth decreases with every increase in the quantity offered for sale. The unit of time may be chosen according to the circumstances of each particular problem: it may be a day, a month, a year, or even a generation.But in either case it must be short-lived relative to the duration of the market in question.We shall assume that during this period the general condition of the market has remained unchanged; for example, that there have been no changes in style or taste; no new substitutes affecting demand, no new inventions disturbing supply.

The cases of normal supply are more uncertain; and a full study of them must be left to later chapters.They vary in detail according to the length of the period in question; chiefly because the physical capital of machinery and plant and the immaterial capital of business skill and organization grow and decay slowly. Let us recall the "representative firm" whose internal and external economies in production depend on the total production of the goods it produces.Leaving aside for the moment all further investigation of this dependence, let us assume that the normal supply price of any quantity of the commodity may be regarded as the normal production charge (including the operating margin) of the plant to it.That is to say, we assume that it is a price whose expectation is just enough to maintain the existing total production; at this time, some enterprises are rising and producing continuously, while others are dying and reducing production. , but the total output remains unchanged.A higher price would promote the growth of thriving firms and moderate (but not prevent) the breakdown of declining firms, with the net result being an increase in aggregate production.Conversely, a lower price will hasten the disintegration of a declining firm and weaken the development of a thriving firm;

Reduced production in general.A rise or fall in price has the same, though not equal, effect on large corporations, which tend to stagnate and seldom fail. Section V supply table. To make our concept clear, let us take the woolen industry as an example.Let us suppose that a man acquainted with the woolen trade wishes to find out what is the normal supply price of a certain woolen cloth for the next year's production of millions of yards.He is bound to calculate (1) the price of the wool, coal, and other raw materials with which this woolen cloth was made, (2) the wear and tear and depreciation of plant, machinery, and other fixed capital, (3) the interest and insurance on the whole capital, ( 4) the wages of the factory workers, (5) the gross profit (which includes loss insurance premiums) on the operations of the people who take the risk, plan and oversee the business.He will, of course, calculate the supply prices of the various elements from the quantities of them employed, assuming a normal supply; adding these supply prices together, he finds the supply price of the felt. We assume that the supply price list (or supply schedule) is formulated in the same way as our demand price list.The supply prices of the various quantities of the commodity in a year, or in any other unit of time, are to be juxtaposed with this quantity.As the annual output of commodities increases, the supply price can increase or decrease, or even increase and decrease alternately.For if nature resists obstinately against the efforts of man to demand more raw materials from it, and if there is no room at that period for the introduction of new and important economic methods in industry, the supply price will rise; It may be profitable for machines to replace manual labor, and the increase in production will inevitably lower the production costs of our representative enterprise.But the fall of supply prices as output increases must create their own special difficulties; These difficulties shall be discussed in chapter twelfth of this book. Section VI equilibrium output and equilibrium price.The supply price of a commodity is not closely related to its actual cost of production.The true meaning of the normal equilibrium situation. Meaning of the term "long term". Thus, if the output (in a unit of time) is such that the demand price is greater than the supply price, the sellers will not only get enough to make it worthwhile to bring such an amount to market, but will give a little more, Then there is a positive force at work which tends to increase the quantity sold.Conversely, if the output is such that the demand price is less than the supply price, the sellers will not get enough to justify sending such a quantity to market; Hence those who, on the verge of doubt, are hesitating whether they should go on producing, decide to stop, and there is thus a positive force at work which tends to reduce the quantity sold.When the demand price is equal to the supply price, there is no tendency for output to increase or decrease, and it is in equilibrium. When supply and demand are balanced, the quantity of goods produced in a unit time can be called the equilibrium output, and its selling price can be called the equilibrium price. This equilibrium is a stable equilibrium; that is, if prices deviate slightly from it, there will be a tendency to recover, like a pendulum swinging back and forth along its lowest point. As we shall see, it is a characteristic of all stable equilibria that, in equilibrium, those quantities for which the demand price is greater than the supply price are precisely those quantities for which the equilibrium quantity is less, and vice versa.Because when the demand price is greater than the supply price, there is a tendency for output to increase.If, therefore, the quantities for which the price demanded is greater than the price supplied are precisely those quantities which are less than the equilibrium output, then if the scale of production is temporarily reduced to a little below the equilibrium output, it will tend to recover; In theory, the equilibrium is stable.If the quantities for which the demand price is higher than the supply price are precisely those quantities for which the equilibrium quantity is less than the equilibrium quantity, then the demand price for those quantities greater than the equilibrium quantity must be lower than the supply price.If, therefore, the quantity of production expands more or less above the equilibrium quantity, it will tend to recover; and so far as movements in that direction are concerned, the equilibrium will be stable. When supply and demand are in stable equilibrium, if any accident causes the scale of production to leave its equilibrium position, there will be certain forces acting immediately, and they have a tendency to restore it to the equilibrium position; just as a line hangs If a stone leaves its equilibrium position, the gravitational force will immediately have the same tendency to bring it back to its equilibrium position.The fluctuations of the quantity of production about its equilibrium position are of the same nature. But in real life, this wobble is seldom as rhythmic as the wobble of a pebble suspended randomly by a string.The comparison would perhaps be more accurate if the line had been suspended in the murky waters of a waterwheel ditch, in which the water sometimes flows freely and at other times is partially cut off.Nor is this intricacy sufficient to account for the disturbances that beset economists and businessmen.Nor does this illustration overcome some difficulties of real practical value if the informant swings his hand in a partly rhythmic and partly arbitrary motion.Because in fact the demand table and the supply table are not constant for a long time, but are constantly changing; each of their changes will change the equilibrium output and equilibrium price, thus giving a new swing of output and price. center of. The foregoing considerations show the enormous importance of the time factor with respect to supply and demand, which we shall now examine.We shall gradually discover many different limitations of the principle that a thing may be represented by the price of its production in terms of its actual cost of production, that is to say, of the efforts expended, directly and indirectly, in its production. and sacrifice. For in an age of rapid change like ours, the equilibrium of normal demand and normal supply and the total amount of satisfaction obtained from the consumption of a commodity are inconsistent with the total amount of effort and sacrifice expended in producing it.Even if normal income and interest, the monetary reward paid for such efforts and sacrifices, were precise measures of effort and sacrifice, these two things would not be quite consistent.The oft-quoted and oft-distorted axiom of Adam Smith and other economists really means that the normal or "natural" value of commodities results from the tendency of economic forces "over a long period of time" to produce the value of.That is just the kind of average value that economic forces will produce if the general conditions of life remain static long enough for these forces to play their full part. But we cannot predict the future perfectly, the unexpected will happen; existing trends can be changed before they have had time to play what they now seem to be fully capable of.The fact that general conditions of life are not static is the source of many difficulties encountered in applying economic principles to practical problems. Of course, normal doesn't mean competitive.Market prices and normal prices are likewise produced by many influences, some of which are based on morality, some on material grounds, some of which are competitive and some which are not.When we distinguish between market prices and normal prices, and between the broad and narrow uses of the term normal prices, it is the persistence of the influences under consideration, and the time necessary for their operation, that is to be observed. Section VII In a short period of time, utility plays a major role in affecting value, while in a long period of time, production cost plays a major role in affecting value. The rest of the chapters of this book shall be concerned chiefly with the principle explaining the tendency in long periods of time for the value of commodities to be equal to their cost of production, and with limitations to this principle.In particular, the concept of equilibrium, which was initially discussed in this chapter, will be studied more carefully in Chapters 5 and 12 of this part.The debate over whether "cost of production" or "utility" determines value is discussed in Appendix I.But on this last question, it may not be unhelpful to say a few words here. We discuss whether value is determined by utility or by cost of production, as we discuss whether a piece of paper is cut with the top edge of the scissors or the bottom edge of the scissors.Indeed, when one side of the scissors is held still, the paper is cut by moving the other side. We can roughly say that the paper is cut by the second side.But this statement is not very precise, and it can be said only if it is regarded as a popular explanation of the phenomenon, and not as an exact scientific explanation. Likewise, when a finished product has to be sold, the price people are willing to pay for it will be determined by their desire to have it and the amount they can spend on it.Their desire to have it depends in part on the chance that, if they do not buy this thing, they will be able to buy another like it at an equally low price.This opportunity depends on those factors which govern the supply of the latter, which in turn depends on the cost of production.But the quantity to be sold is sometimes actually a fixed quantity, as is the case, for example, in the fish market, where the price of fish for the day is determined almost entirely by the quantity of fish on the fish list compared with the demand.If one assumes that there are only so many fish, and says that the price is governed by demand, this simplification may perhaps be excused, provided that the statement does not pretend to be a strictly exact one. .Likewise, it would be forgivable to think that the difference in prices charged by Christie's when selling rare books before and after was determined solely by demand, but this is by no means quite accurate. To take an example of the opposite extreme, we see that some commodities obey the law of constant income, that is to say, no matter whether the output of commodities is large or small, their average costs are roughly the same. In this case, the market price depends on At a normal level of fluctuation there would be such a definite and fixed (expressed in money) cost of production. If there is occasional high demand, the market price will temporarily exceed normal levels, but as a result production will increase and the market price will decrease.The opposite is true if demand falls below its normal level for a certain period of time. In this case, if one is willing to ignore the fluctuations of the market, it is assumed that there will be enough demand for a commodity anyway to ensure that some quantity, more or less, of the commodity can be produced at a price equal to the cost of production. If he finds a buyer in the following circumstances, he may be forgiven for saying that the (normal) price is determined by the cost of production, ignoring the influence of demand, provided he does not presume that his wording of this statement is scientifically sound. Be precise and state the impact of requirements where appropriate. We may, therefore, conclude that, generally speaking, the shorter the period we consider, the more attention must be paid to the effect of demand on value; the longer the period, the more important will be the effect of the cost of production on value.For the effect of a change in the cost of production on value generally takes longer to manifest itself than the effect of a change in demand.Actual value at any time, commonly called market value, is often more affected by temporary events and intermittent and short-term factors than by those permanent factors, but in the long run these impermanence The effects of intermittent and irregular factors cancel each other out to a great extent; therefore, over long periods of time permanent factors completely dominate value.But even the most persistent factors are prone to change.Because the whole structure of production is in flux, the relative production costs of various things are constantly changing from one generation to another. When we consider costs from the point of view of the capitalist employer, we must of course measure them in terms of money.For his direct relation to the effort which the worker must exert to perform the work is in the monetary remuneration which he must pay.And his relation to the real cost of their effort and the training necessary for that effort is only indirect, although, as we shall see later, it is also necessary for him to measure his labor in money of.But when we examine costs from the social point of view, and inquire whether the costs of attaining a definite result increase or decrease as economic conditions change, what concerns us is the actual cost of effort of a different nature and the cost of waiting. actual cost.If the purchasing power of money measured in terms of effort is roughly constant, and if the rate of return on waiting is also roughly constant, then the costs measured in money and actual costs coincide: but we should never lightly assume that they are equal.These considerations are also generally sufficient to describe the term cost below, although not clearly indicated in the context sentence.