Chapter 35 Chapter 6 Joint Demand and Compound Demand, Joint Supply and Compound Supply

The first section is about indirect derived requirements.Joint demand.An example of labor disputes in the construction industry.The law of derived demand. Bread directly satisfies human needs.Its needs are called immediate needs.But the mills and ovens, by which bread, etc. are made, satisfy man's wants indirectly, and their wants are called indirect wants.Generally speaking: The demand for raw materials and other means of production is indirect, being derived from the demand for the immediately usable products produced by means of them. The services of the flour mill and the oven are jointly linked in the finished bread, so their demand is called joint demand.Moreover, hops and malt are complementary to each other, and are used together to make ale...therefore, among several auxiliary, the demand for each arises from their production of some finished product, such as a loaf of bread or a cask Ale is served in common with those served.In other words, there is an associated demand for the service that any one of these auxiliary goods renders in producing some product that directly satisfies a need and thus has a direct demand.The immediate demand for finished goods is actually divisible into many derived demands of those things with which it is produced.

Let me give another example to illustrate.The immediate demand for houses gives rise to an associated demand for building labour, brick, stone, timber, etc., of all kinds.And these are the factors of production of all kinds of construction work, or new houses as they are called for simplicity.Among them, the demand for any element, such as the demand for plasterers, is only an indirect or derived demand. Let us examine in connection with the above example the events of the kind which frequently occur in the labor market; labor disputes last for a short period, and the factors which we have to consider as regulating supply and demand are only those which operate in the short term.

This instance is of great practical importance, and therefore requires our special attention.But we should see that, since the short run is meant, it is an exception to our criterion of cases in this chapter and in the following chapters where there is sufficient time for the forces of supply to play their full long run. Let us assume that the supply and demand for houses is in equilibrium and that a group of workers, say, masons, goes on strike, or that there is some other obstacle affecting the supply of masons' labor.In order to isolate the demand for this factor and study it in isolation, we assume first that the general conditions for the demand for new housing remain unchanged (that is, the demand schedule for new housing still applies), and second that the general conditions for the supply of the other factors Invariant, two of which are of course the business capacity and business organization of the builders (that is, we assume that their supply price lists are also valid).A temporary reduction in the supply of mason labor will then lead to a corresponding reduction in the quantity of construction: the demand price for the reduced number of houses will be higher than before, while the supply prices for the other factors of production will remain the same.The price at which the new house can then be sold, therefore, has a considerable surplus over the sum of the purchase prices of the other elements necessary for its construction, and this surplus is the limit of the possible increase in the price of the mason's labor, provided that his labor is indispensable.This surplus of different quantities, corresponding to different degrees of reduction in the supply of mason's labor, is determined by the maxim: in respect of different quantities of a commodity, the amount of surplus available for any factor employed in its production The price of a commodity is limited to the difference in that price which is the sum of the prices at which the quantity of the commodity can find buyers minus those prices at which the other corresponding factors of production are supplied.

In technical terms, the schedule of demand for any factor of production for a commodity can be derived from the schedule of demand for that commodity by subtracting from the demand prices for the various quantities of the commodity the sum of the supply prices for corresponding quantities of the other factors. Section 2. Some conditions under which a reduction in supply can greatly raise the price of a factor of production. But when we apply this theory to real life, it is important to keep in mind the fact that if the supply of one factor of production is disrupted, the supply of the other factors of production is likely to be disrupted as well.Especially when the element whose supply is disturbed is the same kind of labor as that of a mason, the employer's remuneration generally acts as a buffer.That is to say, the loss falls first on their shoulders; but by laying off some of their workers and lowering the wages of others, they end up distributing most of the loss to other factors of production.The details of the process of achieving this are different and depend on the actions of commercial alliances, on bargaining in the market and other reasons which we shall not discuss at this moment.

Let us examine what are the conditions under which a thing is required not for immediate use, but as a factor of production of a commodity, and a diminution of its supply may cause its price to rise sharply.The first condition is that the factor is necessary, or almost necessary, for the production of the commodity, since no suitable substitute can be bought at a reasonable price. The second condition is that the good (the factor being the one necessary to produce it) is one whose demand is so inelastic that a reduction in its supply will make consumers willing to pay a higher price rather than empty-handed home; this includes, of course, the condition that an adequate substitute for the commodity cannot be bought at a price slightly above its equilibrium price: if a reduction in housing construction raises house prices substantially, then the rush to acquire The builders of the extra profit will bid each other up to bid for the plasterer's labor available in the market.

The third condition is that the price of this factor constitutes but a very small part of the cost of production of the commodity.Since the wages of a plasterer account for but a small part of the total cost of building a house, even a fifty per cent increase in wages would add only a small percentage to the cost of the house, thereby putting little restraint on demand . The fourth condition is that even a slight reduction in the quantity demanded will cause a considerable reduction in the supply price of the other factor of production; for this will increase the margin with which to pay the high price of that factor.For example, if bricklayers and other workers or employers cannot find other work and are not available, they may be willing to work for much lower wages than before, which will increase the higher wages paid to masons. the difference.These four conditions are independent, while the results of the last three conditions are cumulative.

If it were possible to do the work without plaster, or to employ at low cost someone other than a plasterer, the rise in the wages of a plasterer would be limited.In some cases the oppression of one factor of production of a commodity on the other by the action of derived demand is moderated by the principle of substitution. Moreover, serious difficulties encountered in obtaining one of the factors of production of a finished product can often be overcome by changing the nature of the finished product.Some plasterer's labor may be indispensable; but men are often hesitant about how much whitewash is worth using in a house, and if its price should rise, they will use less whitewash.That intensity of satisfaction which they lose by using a little less plaster is its marginal utility; the price they are just willing to pay to use it is the real demand price of the plasterer's work for that quantity of use.

In ale, so is the joint demand for malt and hops.But their proportions can be changed.That ale, which is distinguished from other ale only by its greater presence of hops, fetches a higher price.This difference represents the demand for hops. The relationship between masons and bricklayers, etc., is a phenomenon as instructive as it is romantic in the history of unions and struggles of trade unions in similar trades.But the overwhelming majority of the cases of joint demand are those of a certain raw material and of workers for processing; for example, cotton, linen, copper or iron and the workers for processing these materials.Moreover, the relative prices of different foodstuffs vary widely depending on the supply of skilled labor for cooks: for example, many parts of many kinds of meat and vegetables are of little value in the United States because skilled cooks are scarce there, and The wages are high, but they are of proper value in France, where cooking skills are very different.

The third section is compound demand. We have already discussed how the aggregate demand for any commodity consists of the demands of the various groups that want it.But now we can extend the concept of composite demand to the production necessities required by several groups of producers. Almost every kind of raw material, and almost every kind of labor, is employed in many different branches of industry, and produces many different kinds of commodities.Each of these commodities has its own immediate demand; from that demand is derived a derived demand for whatever is used in its production, which is "distributed among its various different uses" that compete with each other; the corresponding derived needs are competing needs.But they co-operate in relation to the supply of products; they "synthesize" the aggregate demand which exhausts the supply, just as the partial demands of several social classes for finished products are added together to synthesize its aggregate demand.

The fourth section is joint supply.Derived supply price. We may now consider joint products: that is, they are not easily produced independently; are co-existing from the same source, and therefore, so to speak, have a joint supply, like beef and ox hides, or wheat and straw.This case is the same as that of those things which have associated demand, and can be discussed in almost the same terms by substituting "supply" for "demand," and vice versa.Just as there is an associated demand for those things which are commonly used for the same purpose, so there is an associated supply for those things which have the same source.A single supply from the same source may be divided into many derivative supplies of those things derived from it.

For example, since the abolition of the Corn Regulations, the greater part of the wheat consumed in Great Britain has been imported, of course without any straw.This causes a scarcity of straw, and a rise in its price.Farmers who grow wheat count on wheatgrass to get most of the crop's value.Thus, the value of straw is higher in the wheat-importing country, and lower in the wheat-exporting country.Likewise, in the wool-growing parts of Australia the price of mutton was at one time very low.Wool is exported, and mutton has to be consumed in the country; because the demand for mutton is not large, the price of wool has to cover almost all the cost of co-production of meat and wool.Later, low meat prices stimulated the development of the meat processing export industry, and now the price of meat in Australia has increased compared to before. It is very rare that the cost of producing both associated products at the same time is exactly the same as the cost of producing one of the separate products.If any product of a firm has a market value, it is almost certain that special care and expense have been expended on it, which would be reduced or dispensed with if the demand for the product were to decline sharply.For example, if straw is not worth much, farmers work harder than usual to make ears as large as possible for the stalks.Again, the importation of foreign wool has improved the English sheep by proper crossing and selection, so as to gain early weight, even at the cost of a reduction in the quality of the wool.Only when one of the two things produced by the same production process is worthless, unsalable, and costs nothing to reject, is there no temptation to vary its quantity.It is also only in these exceptional cases that we cannot determine the respective supply prices of the joint products.For if it were possible to vary the proportions of these products, then, by changing them so as to reduce the quantity of one of them slightly without affecting the quantity of the other, we could ascertain what part of the total cost of the production process was saved.This part of the cost is the production cost of the marginal factor of the product; it is the supply price we are looking for. But these are exceptional occasions.A firm, or even an industry, often finds it advantageous to manufacture several types of products using as much as possible the same equipment, technology, and business organization.In these cases the cost of any one thing employed in several uses must be met by the results it produces in those uses; but there is seldom any law of nature to determine the relative importance of these uses, Or the proportion by which the total cost is allocated: many are shifted by the changing characteristics of the market. Section V compound supply. Now we can discuss the problem of compound supply analogous to compound demand.According to the principle of substitution, a need can often be satisfied by any one of several ways.These different paths are in competition with each other; the corresponding supplies of commodities are thus also competing with each other.But they are cooperative with each other in relation to demand; "composite" into an aggregate supply that satisfies demand. If the causes which govern their production are about the same, they may in many cases be regarded as a commodity.In many cases, for example, beef and mutton may be regarded as varieties of one commodity; but in other cases, as in the case of the supply of wool, they must be treated separately; It is a factor of production. For example, there are many kinds of fibers used to make ordinary printing paper.How, as has been stated above, the strong effect of the derived demand on the supply of one of several auxiliary goods, like the supply of mason's labor, is apt to be weakened when the demand is satisfied by a competing supply of a rival good which can substitute for it. . The sixth section deals with the intricate relationship among commodities. All these four principal questions which have been described in this chapter have some relation to those factors which determine the value of almost every commodity.Many of the most important cross-relationships among the values ​​of various commodities are not obvious at a glance. For example, when charcoal is generally used in ironmaking, the price of leather is to some extent and the locus of Q is the supply curve of the means of satisfying said demand because once it temporarily gains an advantage, increased use of it will lower it. supply price, thereby increasing its sales, while its supply price continues to fall, and so on.Thus its advantage over other competitors continues to increase until it drives them out of the field.Indeed, there are notable exceptions to this rule; Those commodities which obey the law of increasing returns sometimes seem to have been competing in this field for a very long time.Such as various sewing machines and light bulbs.Depends on the price of iron; the tanners have begged that foreign iron should not be used, that the demand of the English ironworkers for oak charcoal might keep the English oak production going, and thereby keep the price of the oak bark from being high.This example may enable us to realize the fact that the excess demand of something may destroy its sources of supply, and thereby make want of the attendant products which it may have; Severe damage to many forests in the UK.Furthermore, excessive demand for lambs has been cited as a reason for the general lack of sheep a few years ago.But some people hold the opposite view.They believe that the higher the price of spring lambs sold to the rich, the more profitable it is to raise sheep, and thus the cheaper the mutton for the people to eat.The fact is that an increase in demand can have the opposite effect, according to whether it acts so rapidly that the producers are prevented from making their production commensurate with it. Next, the development of railroads and other means of communication, which have favored certain industries, such as the cultivation of wheat in some parts of the United States, and the mining of silver in others, has greatly reduced the principal costs of production in those countries of almost every other kind of produce.Moreover, the prices of soda, bleaching-material, and common salt, of other manufactures of which the chief raw material are, are varied relatively by almost every improvement in the method of production employed in those industries; and every change of those prices affects many other The prices of commodities, since the various products of the salt industry are more or less important factors of production in many branches of processed industries. Secondly, cotton and cottonseed oil are joint products. The recent decline in cotton prices is mainly due to the improvement and use of cottonseed oil processing.Moreover, as the history of the cotton famine shows, the price of cotton largely affects the price of wool, linen, cloth, and other like commodities; Cottonseed oil is also increasingly subject to new competition in the same category.Wheat straw, again, has found many new uses in the processing industry, and these inventions have given value to the wheat straw that is usually burned in the American West, and have tended to prevent the marginal cost of production of wheat from rising.