Chapter 34 Chapter 5 Equilibrium of Normal Demand and Supply (continued), with regard to the long run and the short run

The first section is the difference between the term normal as a daily term and as a scientific term. As noted in chapter III, the scope of the term normal varies according to the length of the period in question.We shall now examine them more closely. On this occasion, as on others, the economist reveals only those difficulties dormant in everyday discourse, that by facing them squarely they may be completely overcome.For in everyday life people are accustomed to use the word normal differently from period to period, and let the semantics account for the transition from one period to another.The economist follows this practice in everyday life, but while taking pains to point out the transition, he sometimes seems to create the very complexity that he actually reveals.

For example, when it is said that the price of wool on a certain day was abnormally high, although the average price throughout the year was abnormally low, that miners' wages were abnormally high in 1872 and abnormally low in 1879, that workers' wages at the end of the fourteenth century were abnormally low. When (real) wages were abnormally high and abnormally low in the middle of the sixteenth century, everyone understood that the scope of the word normal was different in these different cases. This is best illustrated by those process industries in which the life of the machinery is long and the life of the product is short.When a new textile is first in fashion, and the machinery and equipment suitable for its production are few, its normal price may, within a few months, be that of other textiles which are equally difficult to produce, but which have a large number of suitable machinery and techniques. twice the price.When we consider long periods of time, we may say that its normal price is equal to that of other textiles.But if in the first few months a large quantity of this textile was sold by bankrupts, even if it sold at half the price of other textiles, we would say that its price was abnormally low.Everyone agrees that the semantics indicate the particular use of the word normal in each case, and that formal notes are unnecessary, since misunderstandings can be cleared up immediately by question and answer in ordinary discourse.But let us examine the matter more carefully.

We have seen that the producer of felt must calculate the cost of production of the various factors in accordance with the quantities required for their production; and assume first of all that the supply is normal.But we must also take into account the fact that he should give the term normal a wider or a narrower range, according to the time he expects to be farther or nearer. For example, in calculating the wages required to elicit an adequate supply of labor for the use of a certain class of looms, he may take the prevailing wages for like work in the neighbourhood, or he may consider that the supply of that particular kind of labor is scarce in the neighbourhood, Its present wages are somewhat higher than in the rest of England, and in looking to the next few years in order to account for the influx of labourers, he may adopt a normal rate of wages somewhat lower than the prevailing wages then and there, and finally, or he may think, that because Fifty years ago, people were overly optimistic about the future of woolen cloth. The wages of weavers all over the country were abnormally low compared with other workers of the same level.He probably thought that the trade was overpopulated, and that parents had begun to choose for their children those occupations which were more purely profitable and less difficult; , looking to a long period into the future, he is bound to adopt a normal rate of wages somewhat higher than the prevailing average wages.

Moreover, in calculating the normal price of wool, he may take the average price of the past few years.He will estimate any change which is likely to affect the supply of wool in the near future.He would consider the consequences of droughts, as they occur from time to time in Australia and elsewhere; as droughts are a regular occurrence, they cannot be regarded as abnormal.But he does not consider here the chance of us being involved in a major war which may disrupt the supply of Australian wool; accounted for. He may likewise treat the risks arising from domestic insurrection or any violent and prolonged disturbance of an extraordinary character in the labor market.But when he calculates the amount of work that can be wrested from equality under normal circumstances, he is likely to take into account those small interruptions caused by labor disputes, which arise so often that they should be regarded as the normal state of things. , that is, don't see it as abnormal.

In all these calculations, he does not ask how far humans are exclusively influenced by the motives of self-interest or self-esteem.He may know that anger and vanity and envy and wounded pride are almost as common causes of strikes and sabotages as the pursuit of pecuniary gain: but that is beyond his calculation.All he wants to know about them is whether their operation is sufficiently regular to enable him to take due account of their effect on the interruption of work and on raising the price of the product normally supplied. Section II The complex issue of normal value must be dissected.The fiction of the first step is static; its revision makes it possible to deal with the problem of value through auxiliary static assumptions.

The factor of time is a major cause of those difficulties encountered in economic research, which necessitate a step-by-step approach for persons of limited ability; dividing a complex problem into parts, studying one part at a time, and finally synthesizing his partial solutions. resulting in a more or less comprehensive solution to the entire problem.In dividing the problem into several parts, he temporarily put aside those disturbing factors that are inconvenient when they arise, within the so-called ceteris paribus.The research on certain trends is carried out on the assumption that other conditions remain unchanged. The existence of other trends is not denied, but their interference is temporarily ignored.In this way, the smaller the problem is, the more precisely it can be dealt with, but the less it will correspond to real life.However, treating the small problem precisely one at a time helps to deal with the larger problem that contains it much more precisely than in other cases.Gradually more and more things can be freed from the limits of the range, ceteris paribus; precise discussions can be carried on less abstractly than in the preceding stage, and realistic discussions can be carried on more precisely.

A study of the influence of the time factor on the relation between cost of production and value begins by considering the famous "static" assumption, of which little is affected by the above; and comparing the results found therein with those found in the modern world. The name static derives from the fact that in this state the general conditions of production and consumption, of distribution and exchange are static; yet it is full of movement; because it is a way of life.The average age of the population may remain constant, though individuals grow from youth to manhood and then to old age.For many generations, equal quantities of products per population have been produced by the same classes in the same way; hence the supply of the means of production has had ample time to adapt to the steady demand.

Of course, we can assume that, in our statics, each firm is always of the same size, and has the same business dealings.But we don't have to; We consider it sufficient to assume that some firms are rising and others are declining, but, like a typical tree in a virgin grove, the "representative firms" are always of almost the same size, so that the firm The economy generated by the resource remains unchanged, since the total production remains unchanged, as does the economy caused by nearby auxiliary industries, etc. (that is, the internal and external economies of the "representative firm". The price at which a person enters the trade must in the long run be sufficient to cover the cost of establishing commerce; a certain proportion of this must be included in the total cost of production).

Under static conditions, the obvious law is: production cost determines value. Various effects are mainly attributed to one cause, and there are not many complicated actions and reactions between cause and effect.The various cost elements are determined by "natural" laws, subject to a certain control of fixed habits.Reaction of demand is non-existent; there is no fundamental distinction between immediate and subsequent consequences of economic causes; in short, if we assume uniform harvests in that monotonous world, there is no long-run normal The difference in value: because the scale of the representative enterprise is always the same, and it always uses the same method and does the same kind of transactions to the same extent, there is neither peak season nor off-season, and the normal supply price is determined by it. That normal fee is always the same.The demand-price schedule is always constant, as is the supply schedule; thus normal prices never change.

But that's not true in the world we live in.In the real world, each economic force constantly changes its role under the influence of other economic forces that operate around it.Variations in the quantity of production, in the method of production, and in the cost of production are here always mutually dependent; they always affect the nature and degree of demand, and are also influenced by the latter.Furthermore, all of these influences take time to manifest themselves, and generally speaking no two influences go hand in hand.In the real world, therefore, any facile doctrine of the relation between production costs, demand, and value is necessarily false: the more intelligible it is made apparent by artifice, the more harmful it is.Someone is likely to be a better economist if he trusts his common sense and practical intuitions, and doesn't pretend to study the theory of value and insist that it is easy.

The third section continues. The static state above is one in which the population does not change.But almost all of its salient features can be found in places where population and wealth are increasing, assuming their rates of increase are approximately equal, while land is not scarce: and assuming further that methods of production and commercial conditions are few Changes, especially where the character of the people is a constant quantity.For in such a state the most important conditions of production and consumption, as well as of exchange and distribution, remain of the same nature, and their general relations to one another are the same, although they are all increasing quantitatively. This relaxation of the strict constraints of pure static brings us one step closer to real life; the more we relax, the closer we come.In this way we gradually resolve the difficult problem of the interplay of innumerable economic causes.Under static conditions, all the conditions of production and consumption are reduced to a static state, but we can use the so-called static method (this name is not very precise) to make some less serious assumptions.In that way we fix our attention on some central point: we assume for the moment to bring it into a static state, and proceed to study the forces connected with it, affecting things around it, and any forces which bring them into equilibrium. trend.Many such local studies can solve problems that are too difficult to solve at one blow. The fourth section studies the equilibrium of normal demand and normal supply, which can be divided into studies on long-term equilibrium and short-term equilibrium. We can roughly divide the problems related to fisheries into several categories, one is caused by very rapid changes such as weather vagaries, and the other is affected by changes over a relatively long period of time, such as within a year or two after rinderpest The problems caused by the increased demand for fish due to the scarcity of meat; or, finally, we may conceive that the rapid increase in the population of mental artisans may cause a surge in the demand for fish during a whole generation. The daily fluctuations of the price of fish, due to the vagaries of weather, and other similar causes, are governed in modern England by virtually the same causes as in our supposed statics.Changes in the general economic conditions around us are rapid; but they are not rapid enough to affect appreciably the short-term normal levels around which prices fluctuate from day to day.In studying such price fluctuations, they can be ignored (ceteris paribus). Let us go ahead and assume that there is a great increase in the demand for fish, say, due to an epidemic of livestock disease which makes meat an expensive and dangerous food for several years, causing a great increase in the general demand for fish. .We now place those weather-induced changes in the ceteris paribus, because these changes are so rapid that they soon cancel each other out, and they are therefore, in matters of this kind, not important.For the opposite reason, we also disregard changes in the number of those who are brought up as fishermen, because these changes are too slow to have much effect during a year or two of scarcity of meat.Disregarding these two kinds of changes for the moment, we concentrate our attention on such influences as, for instance, the adequate wages given to the crew, so as to induce them to remain in the fishery for a year or two, rather than seek another employment on board the ship.We believe that some old fishing boats, even those that are not purpose-built, can be refurbished and used to fish for a year or two.The normal price of the supply of fish for any day which we seek is the price at which the labor and capital rapidly attracted to the fishery are sufficient to obtain that supply in a normal day of fishing in the catch; The effects of available capital and labor are determined by narrow causes like these.The new level around which prices fluctuate is obviously higher than before during these years of outsized demand.Here we see an illustration of the almost universal law that, under conditions in which the word normal is used for short periods, an increase in the quantity demanded raises the normal supply price. This law holds almost universally even for those industries which obey the law of increasing returns in the long run. But if we turn to the normal supply price in the long run, we find that it is governed by different causes, with different effects. For assuming that abstaining from meat causes people to permanently abhor meat, and assuming that the increased demand for fish lasts long enough for the forces governing the supply of fish to work fully (the day-to-day and year-to-year fluctuations continue, of course, But we can put them aside).The fish sources in the sea may show signs of depletion, and fishermen may have to go to farther coasts and deeper oceans to fish, because nature gives diminishing returns to labor and capital that increase a certain efficiency.Those, on the other hand, may be right in thinking that man is only insignificantly responsible for the continual decline of fish; , it seems that after the overall scale of the fishery is expanded, the harvest can be obtained as good as before.At any rate, after the fishery has been established on its present enlarged scale, the normal cost of furnishing a good boat with capable boats must be no higher, and perhaps lower.For since fishers need only trained skill, and no special endowment, their numbers may be increased in less than one generation to almost any extent necessary to meet demand; The current scale is relatively large and can be organized relatively thoroughly and economically.Hence, if there were no sign of the depletion of the fish stocks in the seas, a greater supply could be produced at a lower price after a time sufficient for the normal operation of economic causes to operate themselves.And, if the term normal refers to the long run, the normal supply price of fish will decrease as demand increases. In this way, we can emphasize the difference between the average price and the regular price that we have indicated: the average price can be taken from the prices of any group of sales in a day, a week, a year, or any other time period.It could be the average of sales in many markets at any one time, or it could be the average of many such average prices.But conditions that are normal for any type of sale do not seem to necessarily be normal conditions for other types of sale.The average price, therefore, is the normal price, only by chance; it is the price brought about by a certain set of conditions.As mentioned above, the meaning of the word normal is always consistent only under static conditions.In this state, and only in this state, "average price" and "normal price" are synonymous. The fifth section continues. Now consider the problem from another angle.Market value is determined by the relationship between demand and existing commodities on the market; at the same time, it is more or less related to "future" supply, and peer agreements also have some influence. But the present supply itself arises in part from the past activity of the producers, who decided to do so by comparing the prices which their commodities could expect to receive with the costs which they would have expended in producing them. production activities.The range of costs they consider depends on whether they are simply considering the additional cost of using their existing equipment for some additional production, or whether they are considering building new equipment for this purpose.For example, in the case of ordering a locomotive, as we have just discussed, the problem of adjusting the equipment to suit requirements would hardly arise.The main question is whether more work can be done from existing equipment.But judging from the ordering of many locomotives, delivered over a period of several years, the "ad hoc" expansion of equipment for this purpose, and therefore indeed seeing such expansion as a major marginal production cost, should almost certainly be carefully considered . Whether large or small new production appears to have a market, the general rule is that, unless the expected price is very low, that part of the supply which can be produced most easily at little direct production cost will be produced: This part of production is probably not on the margin of production.When prices are expected to improve, the increased part of production will have a surplus well in excess of its direct costs, and the margin of production will stretch outward.In principle, every increase in the expected price induces those who would otherwise produce nothing to produce a little, and those who produce something when the price is lower, to produce a little more when the price is higher.The part of the production of those who are on the verge of this doubt whether it is worth producing for them at this price should be included with the part of the production of those who doubt whether they are producing at all; marginal production at that price.Those who doubt whether to produce a little are, so to speak, entirely on the production margin (or farming margin, if they are farmers).But their numbers are usually few, and their actions are not as important as those of those who in any case produce something. The general meaning of the term normal supply price remains the same whether the short run or the long run is referred to;In each case, it refers to a certain overall rate of production; that is, to a certain total amount of production per day or year.In each case the price is that which is expected to be sufficient and sufficient to compensate those who strive to produce that quantity. In each case the cost of production is the marginal cost of those commodities which are on the margin of not being produced at all, and which would not have been produced had the prices expected to be received from them been lower.But what determines this margin varies with the length of the period in question.In short, the existing quantity of production equipment is regarded as virtually fixed.They are governed by their anticipated needs to consider the level of activity with which these devices will be used. In the long run, an effort has been made to adjust the quantity of these devices to the expected demand for the goods they help to produce.Let us examine this distinction more closely. Section VI In the short run, the number of existing production facilities is actually fixed, but their utilization varies with demand. The immediate result of the expected price increase is to make people actively use all their production equipment, all the time, or even more than the specified time.The supply price was then the money cost of production of that part of the product which compelled the employer to employ such inefficient workers (perhaps worn out by overtime) at such high wages, and to put himself and others so strained and It was such an inconvenience that he began to wonder if it was worth it to produce that part of the product.The immediate effect of the expected fall in prices is to idle many productive plants, and to relax the work of others; It is worth it for them to produce at any price. But in fact they generally wait for a higher price; and each is afraid of interfering with his chances of later obtaining a better price from his own customers, or if he produces for a large and open market, then, He is somewhat afraid of the resentment of the other producers if he sells unnecessarily at a price which damages the common market for all.On such occasions, there are those who, whenever the price falls a little, either because of their own interests or because of formal or informal agreements with other producers, stop production temporarily, so as not to further damage the market. ; the production of these people is marginal production on this occasion.For these reasons, the price at which the producers have just refused to produce is the true short-run marginal supply price.This price is almost always higher than, and generally much higher than, the special cost, the direct cost, of raw materials, labor, and wear and tear of equipment (the wear and tear immediately and directly caused by the use of less than fully utilized equipment).This point requires further study. In a trade which employs productive equipment of great value, the immediate cost of the commodity is but a small part of its total cost.An order at a far lower than normal price can still exceed their direct cost by a substantial surplus.But if producers take such orders, eager to save their equipment from being idle, they flood the market with stocks and prevent the recovery of prices.In fact, however, they seldom pursue this policy frequently and without restraint.If they did so, they would bankrupt many in the industry, perhaps themselves; s price.This extreme and violent change is, in the last analysis, neither producer nor consumer; public opinion is not wholly opposed to this practice of commercial morality: direct costs, and "damage the market" at a price substantially insufficient to cover his ordinary expenses. For example, if the immediate cost (in the narrowest sense) of a bundle of cloth at any one time is £100; , in general, even in the short run, the actual effective supply price may not fall below £150; A few special deals are still possible. It would appear that although there are no factors other than direct costs which necessarily directly constitute the short-run supply price, supplementary costs do have some influence indirectly.A producer often does not separate the cost of each individual fraction of the output he produces; he tends to treat the greater part, and in some cases even the whole, of the output more or less as a unit.He examines whether it is worth adding some new business to his existing business, whether it is worth adopting new machinery, etc.He regards in advance more or less the extra output afforded by this variation as a unit; then he bids the lowest price he is willing to accept, more or less by reference to the full cost of the extra output taken as a unit. In other words, in most of his transactions he treats as a unit the addition of his production process, not the individual parts of his product.If the analytical economist is closely connected with reality, he must follow suit.The above considerations tend to obscure the outlines of a theory of value, but they do not affect its essence. In the short run, it may be summarized as follows: the supply of special skills and talents, of suitable machinery and other physical capital, of suitable industrial organization, is too late to meet demand adequately; but producers must use their existing production equipment as much as possible. to adapt their supply to demand.On the one hand, if the supply of production equipment is insufficient, the time is too short to increase them; on the other hand, if the supply is surplus, some of them can only be partially utilized, because the time is too short to gradually increase them. depletion or diversion of their use greatly reduces their supply.Variations in the revenue from these installations have, for a short time, insignificant effects on supply, and have no direct effect on the prices of the commodities they produce; this revenue is that part of the total revenue which exceeds direct costs surplus; (that is to say, it has some properties like rent as detailed in Chapter 8).But unless it is sufficient in the long run to cover an adequate portion of the general costs of the enterprise, production will gradually decrease.In this way, those factors hidden in the long run will have a controlling influence on the relatively rapid changes in short-term prices; and the fear of "damaging the market" will often make these factors move faster than under other conditions. take effect. Section VII But in the long run, the quantity of equipment required for production is adjusted according to the demand for the products of these equipment; the unit of production is a process, not a group of commodities. On the other hand, in the long run, there is time enough for all capital and effort invested in providing material equipment and business organization, and in acquiring vocational knowledge and expertise, to be adjusted according to the incomes that people can expect to earn. .Estimates of those incomes thus directly determine their supply, forming the true long-run supply prices of the commodities produced. A large part of the capital invested in an enterprise is generally employed in establishing its internal organization and external commercial connections.If the enterprise were to fail, even if a considerable part of its original cost could be recovered from the sale of its material equipment, the part of the capital expended in organizing and connecting would still all be wiped out.Whoever intends to start a new enterprise in any industry must take into account the possibility of such losses.If he himself has normal aptitude for such work, he may hope that before long his business will be representative of a considerable economy of mass production (in the sense in which we use the word).If, in his opinion, the net income of such a representative enterprise gives him a greater net income from investing the same capital in other industries, then he will choose this industry.It follows that investment in an industry, which in the long run determines the prices of the commodities produced, is determined, on the one hand, by an estimate of the outlays required to start and run a representative enterprise, and on the other hand, by It is determined by estimates of the various incomes that can be earned over a long period of time. At any one time, some companies are on the rise, while others are declining.But we need not bother with these eddies on the surface of the tide when we examine broadly what determines the price of normal supply.Any increase in production may be due to the fact that a new manufacturer struggles against the odds, with insufficient capital, and toils in the hope of gradually building up a thriving enterprise.Perhaps it was all sorts of new economies of mass production gained by having a wealthy factory, expanding its real estate, increasing output at relatively low cost.At the same time, since this newly increased output is relatively small compared with the total output of the industry, the price will not fall much; therefore, the enterprise has gained a lot by successfully adapting to its environment.However, when there are various changes in the fortunes of certain individual enterprises, as a direct consequence of the increase in the total production volume, the long-term normal price may have a steady downward trend. The eighth section is a simple classification of value problems. Of course, there is no sharp dividing line between "long term" and "short term".Naturally no such divisions are drawn in real economic life; nor are they needed in dealing with practical problems.Just as we compare civilized and savage races, and though we cannot draw a close distinction between the two, we can establish many general propositions about each, so we do not attempt to compare the long run with the short run. draw any strict boundaries between them.If it is necessary to separate an event sharply in order to illustrate a particular point, we may do so by a special explanatory sentence, but the occasions in which it is necessary are neither common nor important. Can be divided into four categories.In each category, prices are governed by the relationship between supply and demand.With regard to market prices, supply refers to the quantity of a commodity that is in hand, and in any case "will be available".As far as normal prices are concerned, if we regard the word "normal" as relating to such short terms as a few months or a year, then supply means, at the price in question, what is available at the price in question. , the equipment including personnel, the quantity of goods that can be produced within a specified time.As far as normal prices are concerned again, if the term normal means a long period of years, supply means the amount of money available during this period to those new and old production plants which can in themselves be produced profitably and put into production. The quantity of that commodity produced.Lastly, there are normal prices which are in gradual or permanent movement, due to the gradual increase of knowledge, population, and capital from generation to generation, and to changes in demand and supply.The rest of the book is chiefly concerned with the third category above: the normal relation of wages, profits, prices, etc., over a considerable period of time.Occasionally, however, changes are dealt with which last for many years; one chapter, Chapter 12 of Book VI, is devoted to the "effect of progress on values," that is, to the study of long-term changes in values.