Chapter 43 Chapter 15 Summary of General Theory of Equilibrium of Supply and Demand

Summary of the fifth part of the first section.See Appendix IX. This chapter contains no new content, it merely summarizes the results of the discussion in Part V.For readers who have skipped the last few chapters above, the second half of this chapter may be helpful, for it points out the gist, though it fails to explain it. In Part V we dealt with the most general theory of the correlation of supply and demand; disregarding as far as possible the particular cases in which it was specifically applied, and comparing this general theory with the several factors of production (labour, capital, The relationship to the specific characteristics of land) is left for Part VI to study.

The difficulty of the problem varies largely with the extent of the place and the duration of the market in question; and the influence of time is more important than that of space. Even in a short-lived market, for example, in a country corn fair, the "bargain" may swing around an average point which has more or less the right to be called the equilibrium price.But traders pay little attention to production costs when they bid one price or reject another.Their main concern is existing demand on the one hand, and existing stocks of commodities on the other.It is true that they pay more or less attention to some production changes that may loom in the near future; but in the case of perishables, they do not look very far: the cost of production, for example, does not have a significant effect on a day's transactions in the fish market. .

Under strictly static conditions, in which supply is in every respect perfectly matched to demand, normal production costs, marginal costs and average costs (rent also counted) are the same thing in the long run and in the short run.But in practice professional economists and entrepreneurs use the word normal with great flexibility in applying it to those causes which determine value.What we need to look at is a fairly clear line of demarcation. At one end of this line is the long period during which economic forces have time to perform their normal functions; thus during which temporary scarcity of skilled labor or any other factor of production can be remedied; and during which , those economies that arise normally (normally, that is, without resorting to any great new inventions) as a result of an increase in the scale of production have had time to manifest themselves.The cost of a representative plant operating at normal capacity and having normal access to internal and external economies of mass production can be used as the standard for calculating normal production costs.If the period under consideration is long enough to allow the investment to establish a new enterprise and to be effective, then the marginal supply price is that price whose expectation is just long enough to induce capitalists and workers of all ranks to spend their physical capital and human life in the long run. Capital is invested in the industry.

At the other end of the dividing line are periods long enough to make it possible for producers to adjust their production to changes in demand, as this adjustment makes use of existing know-how, specialized capital, and industrial organization. if possible; But it is not long enough to make possible any significant change in the supply of these factors of production.In such cases, the quantities of the material means of production and of labor must be regarded to a large extent as readily available; and the increase in marginal supply is calculated by the producers in terms of the quantities that are worth their production with the existing equipment of production. to decide.If business is active, all capacities are stretched as far as possible, and overtime is worked, so that production is limited not by lack of will to produce more or faster, but by lack of strength.But if business is slow, individual producers must decide how close to direct cost it is worth taking new orders.There are no definite laws here, the main force at work is the fear of disrupting the market; and it acts in different ways and to different degrees on different individuals and on different industrial groups.For the chief motive of every kind of open association, of every kind of informal "customary" tacit agreement between employers or employees, is to keep each individual from acting in such a way that his immediate interests disregard the greater total loss of the industry. act to disrupt the common market.

Before the second quarter. Next we discuss the supply and demand of those things which must be brought together to satisfy joint needs, the most important example of which is that of specialized physical capital and individual expertise which must function together in an industry.Because on the consumer side there is not a direct demand for each of them, but only for the products they make together; the demand for each of them is a derived demand.This demand, ceteris paribus, increases with each increase in the demand for the common product and with each decrease in the supply price of the associated factors of production.In the same way commodities which are supplied jointly, such as gas and coke, or beef and hides, can each have only one derived supply price, determined on the one hand by the costs of the whole process of production, and on the other hand by the rest of the supply. It is determined by the demand for common products.

The combined demand for a thing arising from its use on several different occasions, and the compound supply of a thing from several sources of production, do not create great difficulties; for the several quantities required for different purposes, Or several quantities of supplies from different sources can all be added together in the same way as in Part III to synthesize the demand for the same commodity by the rich, the middle class, and the poor. Next we examine the allocation of a firm's supplementary costs (particularly those associated with establishing commerce, marketing, and insurance) among its various products.

The third section continues. We have dealt more fully with the relation of the value of a certain means of production to the value of the product it produces, in the study of the chief difficulties of the normal equilibrium of supply and demand, which have to do with the time factor. If different producers have different conveniences in producing something, its price must be sufficient to compensate those producers who have no special , the scarcity of supply will drive up the price.When the market is in equilibrium, and the thing is being sold at a price sufficient to cover these costs of production, there is a surplus left to those who have any additional convenience except their cost.If these conveniences arise from the appropriation of natural bounties, this surplus is called the producer's surplus, or producer's rent.In short, there is a surplus, and if the owner of the bounty of nature rents it out to other people, he generally receives a money income equal to this surplus by using it.

The price of the product is equal to the marginal (i.e. under the unfavorable condition of not providing rent) The production cost of that part of the product produced, the calculation of the cost of this part of the product, does not fall into circular reasoning, while the cost of other parts does not. If the land formerly used for growing hops was now used as a vegetable plot and afforded a higher rent, the area of ​​land planted with hops would undoubtedly be reduced; and this would raise their marginal cost of production and, therefore, their prices.The rent of land for a certain product to be furnished calls our attention to the fact that the demand for land employed in that product increases the difficulties of supplying other products, though it does not directly enter into those costs of production.The same argument applies to the relationship between the foundation value of urban land and the cost of buildings.

Thus, when we consider normal values ​​in general, when we consider the causes which determine "long-term" normal values, when we deal with the "final" consequences of economic causes, the inclusion of income from these forms of capital must be but the estimate of the probable amount of that revenue directly governs the actions of the producers, who are still in doubt as to whether it is at all worthwhile to increase the means of production.But, on the other hand, when we consider what determines the normal price in the short run (as opposed to the time required for a large increase in those means of production), the effect of the means of production on value is mainly indirect, more or less approximately Influence on the bounty of nature.The shorter the period we consider, the slower the process of production of those instruments, and the part played by variations in the income they afford, in moderating or increasing the supply of the commodities they produce, and thus in raising or lowering the supply price of the products. The smaller it is.

The fourth quarter continues. This forces us to consider the technical difficulties associated with the marginal cost of production of a commodity subject to the law of increasing returns.These difficulties arise from an attempt to regard supply prices as dependent on output, regardless of the length of time the individual firm must occupy in expanding its internal, and especially external, organization; and quasi-mathematical discussions are most prominent.For if changes in supply price and output are considered to be completely interdependent, without involving gradual growth, it seems reasonable to think that the marginal supply price of each individual producer is equal to the increased cost of production by producing his last unit The total amount; this marginal price will in many cases decrease, and will, in many cases, decrease more than the demand price in the common market for the same reason, as his output increases.

Therefore, the static equilibrium theory is not fully applicable to those commodities that obey the law of increasing returns.But it should be seen that in many industries each producer has a particular market in which he is well known, and at the same time he cannot rapidly expand this market, so although he may increase his output rapidly It is technically possible, but he runs the risk of either sharply reducing the price demanded in his own market, or being forced to sell his surplus elsewhere at a less favorable price.Although there are industries in which the individual producers have access to large markets as a whole, there is little internal economy to be gained from increased output in these industries, provided that existing equipment is properly employed.There are, no doubt, industries to which these arguments do not apply--they are in a transitional stage, and it must be admitted that the static equilibrium theory of normal supply and demand is applied reluctantly and unhelpfully.But these cases are rare; and in most manufacture industries the relation of supply price and output shows a fundamentally different character in the long run and in the short run. In short, the difficulty of adapting the internal and external organization of the firm to rapid changes in output is so great that supply prices must generally be considered to rise and fall as output increases or decreases. But in the long run, the internal and external savings of mass production had time to manifest themselves.The marginal supply price is not the production cost of any particular group of products, but the total cost of the marginal incremental amount (including insurance costs and total management compensation) throughout the production and distribution process. The fifth section continues. A study of the effect of a tax on a special occasion, viewed as a change in the general conditions of supply and demand, shows that, when the interests of consumers are properly taken into account, the arguments for a general theory of so-called "maximum satisfaction" are abstract, rather than It's as obvious as economists assume.The theory is that the freedom of individuals to pursue their own immediate interests will enable producers to direct their capital and labor, and consumers to direct their expenditures in those ways that best serve the common good.At the present stage of our research, being confined to the most general analysis, we do not discuss the important question: Under conditions such as present human nature, the power and flexibility of collective action, and the decisiveness and creativity of the will, How much worse than individual action at all; whether, therefore, the waste due to actual inefficiency is not necessarily greater than the economy arising from taking into account the various interests involved in any course.But even disregarding the catastrophes caused by the unequal distribution of wealth, it seems reasonable to believe that aggregate satisfaction, which is far from the maximum, can be achieved by promoting the collective production and consumption of those commodities for which the law of increasing returns plays a special role. Actions are greatly enhanced. This argument is confirmed by the study of monopoly theory.What the monopolist pays attention to at present is to adjust the production and sales of his goods so that he can obtain the maximum net income, but the policy he adopts is probably not the one that provides the maximum total satisfaction.The conflict between individual and collective interests seems to be less important for those commodities which obey the law of diminishing returns than for those quotients which obey the law of increasing returns. In the latter case, however, there seems to be good reason to believe that government intervention is often of direct or indirect benefit to society, since a large increase in production increases the surplus of consumers much more than the total cost of production of the product.A more precise notion of supply and demand, especially when represented graphically, can help us understand what statistics should be collected and how they should be used to account for various conflicting public and private economic interests. Ricardo's theory of the relation between production costs and value occupies such an important place in the history of economics that any misunderstanding of its practical nature must be very harmful.Consequently, there is a widespread belief that this theory needs to be adapted for contemporary economists.The reasons for not accepting this view are indicated in Appendix IX, and also for the contrary view that the foundations of the theory left by Ricardo remain intact; There are many who are above it, but very few who take it from it.There is an argument there that he knows demand plays an important role in determining value, but he sees it more clearly than cost of production, and so he is giving his friends and himself Omit it from the notes; since he never intended to write a formal treatise.This argument also holds that he sees the cost of production as being dependent on (and not just on, as Marx said he did) the quantity and quality of the labor expended in production, plus ancillary The quantity of capital stock which labor requires and the time required for this assistance.