Chapter 41 Chapter 12 The Equilibrium of Normal Demand and Normal Supply from the Law of Increasing Returns

Section 1 Some of the ways in which the tendency of increasing returns works.The dangers of using the term supply elasticity.The various economic differences between the whole industry and a single plant.See Appendix VIII. We may now continue the studies of Chapters III and V; and examine some of the difficulties connected with the relation of supply and demand for those commodities which tend to produce increasing returns. We have pointed out that trends of increasing returns seldom follow increases in demand.For example, the first result of the sudden fashion of watch-shaped barometers was a temporary increase in price, even though they contained no material other than a small stem.For those well-paid workmen who are not specially trained for this work must be drawn in from other trades; a great deal of labor would be wasted, and the real and money production costs would increase in a short time.

But if this fashion lasted long, the cost of producing barometers would gradually decrease, even without any new inventions.Because a large number of specialized technical personnel will be trained to share various tasks.The work done by specialized machines will be better and cheaper than that which is now done by hand, by the great use of reciprocity of parts; thus, the continued increase in the annual production of gauge barometers will greatly reduce their price. The important distinction to note here is the difference between demand and supply.A fall in the selling price of a commodity always acts on demand in one direction.How much the quantity demanded of a commodity increases depends on how elastic the demand is.Falling prices make it possible for commodities to acquire new or expanded uses, which may take a longer or shorter period of time.But (except in exceptional cases where a fall in price drives the commodity out of circulation) the effect of price on demand is of the same nature for all merchants.Moreover, those demands which appear to be highly elastic in the long run are highly elastic at about the same time; so that, with a few exceptions, we may say that the elasticity of demand for a commodity is high or low without showing that we refers to the length of time.

As for supply, there is no such simple criterion.An increase in the price offered by buyers does always, indeed, increase supply.If what we consider is only short-term, especially a market transaction, then there is indeed a "supply elasticity" similar to demand elasticity.That is to say, the amount that sellers are willing to sell for a certain rise in price depends on the amount of reserves they have behind them and their estimate of the price level in another market.This criterion applies almost equally to those products that tend to have diminishing returns in the long run as to those that tend to increase returns.In fact, an increase in the price charged to an industry may, for a long time, have no appreciable effect on the increase in output if the large plants required by an industry are sufficiently employed to prevent rapid expansion; A similar increase in the demand for handicrafts may rapidly give rise to a great increase in the supply, though in the long run its supply obeys the law of constant or even diminishing returns.

The situation is even more complex on more fundamental issues related to the long term.Since the final quantity of output corresponding to that unconditional demand, even at current prices, is theoretically infinite, the elasticity of supply of a commodity which obeys the law of increasing or even constant returns is theoretically infinite in the long run. is infinite. Before the second quarter. The second point which should be considered is that the tendency of a commodity to fall in its price due to the gradual development of the industry which produces it is quite different from the tendency of an individual factory to rapidly introduce new economies of scale by enlarging its enterprise.

We have seen how each step in the development of an able and enterprising firm makes the next easier and faster.Therefore, if he is lucky and keeps his energy and works hard, his development will probably continue.But these are not sustainable: once they are gone, his business is likely to perish through the action of the factors that made it flourish, unless he hands it over to another man as strong as he was.It can be seen that the rise and fall of individual factories may be constant, but a huge industry undergoes long-term fluctuations, or even continuously develops; It keeps growing year after year.

The factors which determine those facilities of production at the disposal of individual factories, therefore, follow quite different laws from those which determine the total output of an industry.The difference is perhaps even more striking if we take into account the difficulties of selling.Certain industries, for instance, which satisfy particular tastes, are, for the most part, produced on a small scale; Scale-up would certainly lead to many economies of mass production at the same time.But these are just those industries, in which each factory is more or less fixed to its own particular market; if it is confined to this, any sharp increase in its production is likely to bring down the demanded price in that market, and The decline is disproportionate to the new economies of mass production it is about to acquire; even if its production is a tiny fraction of that vast market (and, in a more general sense, the market for which it produces).

Indeed, when commerce is light, a producer will often try to sell his surplus of commodities outside his own particular market at a price slightly above the principal cost of the commodity, while in his market he still seeks to sell at a price which nearly covers the cost of replenishment. Merchandise is sold; much of it in anticipation of the capital invested in establishing the external organization of his business. Moreover, the supplementary costs are as a rule greater than the immediate costs of those commodities which obey the law of increasing returns; for their production requires a great investment of capital in material equipment and in establishing commercial intercourse.This makes him all the more afraid of disrupting his own particular market, or of arousing the displeasure of other producers by disrupting the common market.And these, as we know, act as factors in determining the short-run supply prices of commodities when the means of production are not fully employed.

We cannot, therefore, take the conditions of supply of individual producers as paradigms for determining the general conditions of supply of a market.We must take into account the fact that few commercially viable plants are commercially viable, and that the relationship of the individual producer to his particular market differs in many important respects from that of the producer as a whole. relationship with the common market. The third section continues. The history of individual factories cannot be counted as the history of an industry any more than the history of individuals can be counted as the history of mankind.But the history of mankind is the result of individual histories; and the quantity of production which supplies a common market is the result of those motives which induce the individual producers to increase or decrease their production.It is here that the method of our representative factory helps us.We assume that at any time the plant enjoys an average share of those internal and external economies that the total scale of industrial production to which it belongs has.We recognize that the size of such a factory depends partly on changes in technology and transportation costs, but, other things being equal, is determined by the general expansion of industry.We think its manager considers whether he is worth adding some new business, whether it is worth citing some new machine, etc.We think that he regards the output produced by this variation more or less as a unit, and weighs its advantages and disadvantages.

That's the kind of marginal cost we're looking at.We do not expect it to drop immediately due to a sudden increase in demand, but instead we expect the short-term supply price to increase as production increases.But we also expect a gradual increase in demand to gradually increase the size and efficiency of the typical plant; increasing those internal and external economies it has. That is to say, as a long-term supply price list for these industries, we write the reduced supply price and the corresponding increased quantity of the commodity, thereby showing that the increased quantity will be sold at the lower price. was supplied just in time to meet that fairly steady corresponding demand.We disregard any economies that might be produced by those great new inventions, but we include those that might be obtained by the application of existing ideas; Consistent effect over a long period of time will be achieved.But these concepts must be understood broadly.Trying to make these concepts precise is beyond our power.If we include almost all real-life conditions in our discussion, the problem will rarely remain unsolvable; if we select only a few, tedious and delicate reasoning about them will become a scientific game rather than a guide. Tools that actually work.

The theory of the stable equilibrium of normal supply and demand does help to concretize our concept; in its infancy it does not go too far from reality, and thus provides a considerable picture of the principal ways in which the strongest and most recurring economic forces operate. Realistic picture.But if it is pushed to the distant and complicated logical results, it will be isolated from real life.We are in fact approaching the theme of economic development here; therefore, it is particularly important to remember here that economic problems are incompletely formulated when they are treated as problems of static equilibrium rather than of organic development.Because although only static discussions can give us clear thinking, and thus, it is the only way to see society as an organism more philosophically, but that is only the beginning.

The theory of static equilibrium is only an introduction to the study of economics; it is even only an introduction to the study of the progress and development of those industries which tend towards increasing returns.Its limits are so often overlooked by those who approach it, especially from an abstract point of view, that there is a danger of making the theory completely stereotyped.But with this vigilance one might as well take the plunge; this subject is discussed briefly in Appendix VIII. Principles of Economics--Chapter 13 The Theory of Changes in Normal Demand and Normal Supply in Relation to the Principle of Maximum Satisfaction Chapter 13 Relation of the Theory of Normal Demand and Normal Supply Variations to the Principle of Maximum Satisfaction Introduction to the first section. In the previous chapters of this book, and especially in Chapter 12, we examined gradual changes in the adaptation of supply and demand.But any great and lasting change in fashion; any great new invention, any decrease in population by war or plague, said commodity, or some raw material used therein, or presented as its competitor and possible substitute An increase or decrease in the supply of another commodity, any of which can make the price of the annual (or daily) production and consumption of the commodity no longer equal to the normal demand price and normal supply price of the production and consumption ; in other words, they would necessitate a new demand schedule, or a new supply schedule, or a new demand and supply schedule. We will now begin to examine these issues. An increase in the normal demand for a commodity is either an increase in the price at which various quantities will find buyers, or an increase in the quantity at any price, which means the same thing.There are many reasons for this increase in demand, some of which may be due to the fact that the commodity is becoming more and more fashionable, some may be because it has new uses or new markets have been opened up for it, and some may be because it can be used as a commodity. A long-term decrease in the supply of that commodity that is a substitute for it, or a long-term increase in the wealth and general purchasing power of society, etc.The opposite movement will reduce the demand and thus lower the demanded price.Likewise, an increase in normal supply means an increase in those quantities that can be supplied at various prices, or a decrease in the prices at which different quantities can be supplied.The reason for this change may be due to the opening up of new sources of supply through improved transportation or in other ways; it may be due to the progress of production technology, such as the invention of new manufacturing methods or new machines; subsidy.Conversely, a decrease in normal supply (or an increase in the supply schedule) may be due to the blocking of new sources of supply or to taxes. Section II Results of normal demand increase. We must consider the consequences of an increase in normal demand from three points of view, viz., that the commodity in question obeys the law of constant returns, or the law of diminishing returns, or the law of increasing returns.That is to say, the supply price of the commodity is actually constant for various quantities of output, or increases with increasing output, or decreases with increasing output. In the first case, an increase in demand merely increases output, without changing its price; for the normal price of a commodity subject to the law of constant returns is determined entirely by its cost of production: the demand exceeds in this respect Does not work, i.e. unless there is some demand for the good at a fixed price, it will not be produced at all. .If a commodity obeys the law of diminishing returns, an increase in the demand for that commodity will raise its price and increase output, but not by as much as it would under the law of constant returns. Conversely, if the commodity obeys the law of increasing returns, then an increase in demand will increase output (much more than it would under the law of constant returns) and at the same time lower the price of the commodity.For example, if a thousand things were produced and sold at ten shillings a week, and the supply price for the production of two thousand things a week might be only nine shillings, a small normal rate of increase in demand would Gradually make this price the normal price; for the time we are considering is long enough for the factors which determine supply to play their normal part fully.In either case, if the normal demand falls, rather than increases, the price will rise. The arguments in this section have been employed by some writers in support of the assertion that protective duties on imported manufactured goods generally enlarge the home market for those manufactured goods; s price.Indeed, in a young country, if the system of "protection of infant industries" is well chosen, this result can finally be achieved; in this country, industry, like children, can grow rapidly.But even there, conservation policies are easily misused for the enrichment of specific interests.For the overwhelmingly dominant industries are those which are already so large that further expansion will bring about only a small amount of new economy.Of course, in countries where machinery has long been introduced, as in England, industry generally passes beyond the stage at which it can gain great advantage by protection, and the protection of any one industry almost always tends to diminish the markets for other industries, especially foreign ones.These few observations only show that the issue is complex, and nothing more. Section 3 Consequences of Increase in Normal Supply. We have seen that an increase in the normal demand, while on various occasions leading to an increase of output, will raise prices on some occasions, and lower them on others.But we shall now see that an increase in the conveniences of supply (declining the supply schedule) always lowers the normal price at the same time as it leads to an increase in output.For if the normal demand remains the same, the increased supply can only be sold at a reduced price; but the reduction in price due to some increase in supply will be much greater in some cases than in others.If commodities obey the law of diminishing returns, prices will fall very little; for then the difficulties accompanying increased production will tend to offset the new conveniences of supply.If, on the other hand, commodities obey the law of increasing returns, increased production will bring further conveniences, which will complement those arising from changes in the general conditions of supply; Can cause a large increase in production and thus a fall in price (before the fall in demand catches up with the fall in supply).If demand happens to be very elastic, then slight increases in the conveniences of normal supply, such as some new invention, the introduction of machinery, the opening up of new sources of cheap goods, the abolition of taxes, or the acquisition of subsidies, may increase production Lots of increases and price drops. If we consider the conditions of compound and associated supply and demand described in Chapter VI, we present ourselves with a complex series of problems which can be solved by the methods employed in these two chapters. The fourth section deals with examples of constant returns, diminishing returns and increasing returns. We can now consider the effect of changes in the conditions of supply on consumers' surplus or rent.For simplicity, we may represent by a tax those changes which generally increase the normal supply price of various quantities of commodities, and by subsidy those changes which generally lower the normal supply price of these different quantities. First, if the commodity is one whose production obeys the law of constant remuneration, so that its supply price is the same for different quantities, the decrease in producer surplus will be more than the increase in producer remuneration; therefore, On special occasions some kind of tax is levied, which will exceed the total revenue of the state.For the consumer's loss is equal to the state's gain with respect to that part of the commodity consumption which continues to be preserved; and the consumer's surplus is destroyed with respect to that part of consumption which is destroyed by the rise in prices; Neither state has been compensated for it.Conversely, the increase in consumer surplus caused by a subsidy to a commodity that obeys the law of constant returns is smaller than the subsidy.For in the part of consumption that existed before the subsidy, the increase in consumer surplus is exactly equal to the amount of the subsidy, and in the new consumption induced by the subsidy, the increase in consumer surplus is less than the subsidy. But if the commodity is subject to the law of diminishing returns, some tax will lower its production costs (in addition to the tax) by raising its price and reducing its consumption: the result will be an increase in the supply price by less than the total amount of the tax .In this case the total revenue of the tax may be greater than the resulting loss of consumer surplus, and if the law of diminishing returns is so strong that a slight reduction in consumption reduces the cost of production (other than the tax) considerably, then The total revenue from the tax will be greater than the loss in consumer surplus. On the other hand, subsidies to commodities subject to the law of diminishing returns will lead to an increase in production, and will extend the farming margin to those places and conditions where the cost of production (excluding subsidies) is higher than before.It will therefore lower the price to the consumer, and increase the consumer's surplus by a lesser amount than if the commodity were subject to the law of constant remuneration.In that case, the increase in consumer surplus is less than the direct cost of the subsidy to the state; therefore, in this case, it is much smaller. By the same reasoning it can be shown that a tax on commodities subject to the law of increasing returns is more injurious to consumers than a tax on commodities subject to the law of constant returns.Because it reduces demand and, thus, reduces output.Thus it may add a little to the cost of production.It raises prices more than the tax; and finally reduces the surplus of consumers by an amount much greater than the total revenue which the tax brings to the treasury.Conversely, the subsidization of the commodity causes its price to consumers to fall so sharply that the resulting increase in consumer surplus may exceed the total state subsidy to producers; if the law of increasing returns is sufficiently strong, that is, The increase in consumer surplus must exceed the total state subsidies to producers. When it is necessary to consider tax collection charges and subsidy management fees, as well as the many indirect economic and moral effects that taxes or subsidies may produce, the above results are of reference value for certain tax principles that require special attention in the study of fiscal policy.But these partial results allow us to further clarify the general theory that the position of (stable) equilibrium of supply and demand is also the position of greatest satisfaction: It was all the rage, and that's what we're talking about right now. Section V describes the abstract principle of maximal satisfaction and its limitations. This theory does have an interpretation, according to which each position of equilibrium of supply and demand can be regarded roughly as the position of greatest satisfaction.For if demand prices exceed supply prices, transactions can indeed be effected at those prices, and these transactions provide residual satisfaction to buyers, or sellers, or both.For at least one of the two parties, the marginal utility of what he receives is greater than the marginal utility of what he gives away; while the other party does not gain anything from the transaction, he does not lose anything from the transaction.In this way, each transaction increases the total satisfaction of both parties.But when equilibrium occurs and the demand price equals the supply price, there is no chance of obtaining any such surplus; the marginal utility of what each party receives no longer exceeds the marginal utility of what he gives away in the exchange.However, when production increases beyond the equilibrium output and the demand price is less than the supply price, the kind of transaction conditions that buyers can accept without losses to sellers cannot be achieved. Indeed, the position of equilibrium of supply and demand is the position of greatest satisfaction in the restricted sense that the total satisfaction of the two parties concerned increases until this position is established; and any production beyond the equilibrium quantity, as buyers and sellers do according to their own If the interests of different parties go their own way, they cannot be maintained for a long time. But sometimes there is, and often is implied, the assertion that the position of equilibrium of supply and demand is the position of greatest total satisfaction in the full sense of the word.That is, an increase in production above the equilibrium level directly (that is, independent of the difficulty of increasing production and any indirect harm it may cause) reduces the aggregate satisfaction of both parties.The theory, so interpreted, is not universally true. First, it assumes that all differences in wealth between the parties are negligible, and that the satisfaction of either party measured in a shilling may be regarded as equal to that of any other party measured in a shilling.It is evident that if producers as a class are much poorer than consumers, aggregate satisfaction will be increased by restricting supply so that demand prices surge (that is, when demand is inelastic); A class that is much poorer than the producers will increase aggregate satisfaction by expanding production beyond equilibrium output and selling the goods at a loss. But that can be left for later discussion.In fact it is only a special case of the general proposition that the voluntary or forced distribution of some of the wealth of the rich to the poor appears to increase total satisfaction; stage, it is reasonable not to explore the implications of this proposition.Therefore, as long as we pay attention, we can make such an assumption. But secondly, the theory of maximum satisfaction assumes that producers suffer a corresponding loss from every fall in the price charged for commodities; this does not apply to falls in prices resulting from improvements in the organization of industry.If the commodity obeys the law of increasing returns, an increase in the production of the commodity beyond the equilibrium point can cause the supply price to plummet; although the demand price for the increased quantity falls even more, and thus that production will have some effect on the producer. Some loss, but this loss is much smaller than the monetary value of the benefit to consumers represented by the increase in consumer surplus. Thus, in the case of commodities where the law of increasing returns is very strong, or where the normal supply price falls sharply with an increase in output, the direct cost of a subsidy sufficient to induce a large increase in supply at much lower prices is greater than that of consumption. The remaining increase is much smaller.If the consumers can come to an unanimous agreement, those conditions will be fulfilled which would make this behavior both greatly beneficial to the producer while leaving a huge profit margin for the consumer. The sixth section continues. A simple approach is for societies to tax their own income or the production of goods subject to the law of diminishing returns, and use it as a subsidy for the production of those goods for which the law of diminishing returns is strongly in play.But before taking this course they must have considerations which do not belong to the general theory we are now discussing, but nonetheless have great practical importance.They are bound to take into account: the direct and indirect costs of taxation and subsidies; the difficulty of equitably distributing the tax burden and the benefits of subsidies; There is a danger that the energies of one's own business will be diverted to wooing management subsidizers. Apart from these questions of a semi-ethical nature, there are others of a strictly economic character which have to do with the effect of any particular tax or subsidy on the interests of the urban and rural landowners who occupy the land producing the commodity in question.These are issues which cannot be ignored; but they are so varied in detail that they cannot be discussed here. The seventh section continues. Enough has been said about the nature of the second great restriction which must be added to the theory that the greatest satisfaction will generally be obtained by encouraging each individual to use his means in the manner which is most expedient to him. .It is evident that if he increases the income of the poor by increasing the demand for their services by increasing the demand for his services, he increases total satisfaction more than he increases the income of the rich by the same amount, For a shilling gives much greater satisfaction to a poor man than to a rich man; more beneficial to society.Moreover, even if we assume that a shilling's worth of satisfaction is equally important to everyone, and that every shilling of consumer surplus is of equal importance regardless of the commodity from which it comes, The way you earn your own income has a direct economic stake in society.For if he employs his income in those commodities subject to the law of diminishing returns, he makes those commodities less available to his neighbors, and thereby reduces the real purchasing power of their income; those goods, he makes them more readily available to others, thereby increasing the real purchasing power of their income. Moreover, it is generally held that an equal tax in value of every economic commodity, tangible and intangible, or a tax on expenditure, seems to be the best tax; This argument is untenable.But even ignoring for a moment the fact that the direct economic effects of a tax or subsidy do not constitute all, and often are not even a major part, of the considerations which must be weighed before its imposition, we know that: first, expenditure taxes The destruction of consumer surplus is generally greater than taxing exclusively those commodities which have little economic possibility of mass production and which obey the law of diminishing returns; second, the government taxes those commodities which obey the law of diminishing returns and It is more beneficial to society if part of the income is used to subsidize those commodities that obey the law of increasing returns. Be aware that these conclusions, by themselves, are not adequate grounds for government intervention. But they show that there is much work left for us to do, through the careful collection of supply and demand statistics, and the scientific interpretation of their results, in order to discover what society can do to incorporate the economic activities of individuals into those that most enhance aggregate satisfaction. The working scope of the pathway.