CHAPTER II.

TEMPORARY EQUILIBRIUM OF DEMAND AND SUPPLY.

§ 1. THE simplest case of balance, or equilibrium, between desire and effort is found when a person satisfies Equilibrium between desire one of his wants by his own direct action, as for and effort. instance when he picks blackberries. At first the pleasure of eating is much more than enough to repay the trouble of picking; in fact the action of picking may itself be pleasurable for a time. But after he has eaten a good deal, the desire for more diminishes; while the task of picking begins to cause weariness, which at last counterbalances the desire for eating, and equilibrium is reached. The satisfaction which he can get from picking fruit has arrived at its maximum: for up to that time every fresh picking has added more to his pleasure than it has taken away; and after that time any further picking would take away from his pleasure more than it would add.

In a casual bargain that one person makes with another, as for instance when two backwoodsmen barter a rifle for a canoe, there is seldom anything that can properly be called an equilibrium of supply and demand: there is probably a margin of satisfaction on either side; for probably the one would be willing to give something besides the rifle for the canoe, if he could not get the canoe otherwise; while the other would in case of necessity give something besides the canoe for the rifle. Let us then turn to the organised markets of modern times'.

1 We may put aside also as of very little practical importance, a class of dealings which have occupied a good deal of space in economic literature.

town.

Let us take an illustration from a corn-market in a country The amount which each farmer or other Illustration seller offers for sale at any price is governed by

from a local corn-market of

temporary

his own need for money in hand, and by his a true though calculation of the present and future conditions equilibrium. of the market with which he is connected. There are some prices which no seller would accept, some which no one would refuse. There are other intermediate prices which would be accepted for larger or smaller amounts by many or all of the sellers. Let us assume for the sake of simplicity that all the corn in the market is of the same quality. An acute dealer having corn for sale may perhaps, after looking around him, come to the conclusion that if 37s. could be got throughout the day, the farmers between them would be willing to sell to the extent of about 1,000 quarters; and that if no more than 368. could be got, several would refuse to sell, or would sell only small quantities, so that only 700 quarters would be brought forward for sale; and that a price of 35s. would only induce some 500 quarters to be brought foward. Suppose him further to calculate that millers and others would be willing to buy 900 quarters if they could be got at 35s. each, but only 700 if they could not be got for less than 36s. and only 600 if they could not be got for less than 37s.' He will

They relate to such things as pictures by the old masters, rare coins and other things, which cannot be "graded" at all; for each of them is unique, and has no direct equivalent or competitor. Anyone who offers to buy such a thing, without any thought of selling it again, has to assure himself only that the pleasure he will derive from its possession is as great as that which he could get by spending its price in any other way; the highest price to which he will go is governed by the utility or pleasure giving power to him of money on the one hand and the object of worth on the other. And therefore the price at which such a thing is sold will depend very much on whether any rich persons with a fancy for that particular thing happen to be present at its sale. If not, it will probably be bought by dealers who reckon on being able to sell it at a profit; and the variations in the price for which the same picture sells at successive auctions, great as they are, would be much greater still if it were not for the steadying influence of professional and semi-professional purchasers.

1 This result of his study of the market may be put in a tabular form thus:

conclude that a price of 36s., if established at once, would equate supply and demand, because the amount offered for sale at that price would equal the amount which could just find purchasers at that price. He will therefore take at once any offer considerably over 368.; and other sellers will do the same.

Buyers on their part will make similar calculations; and if at any time the price should rise considerably above 36s. they will argue that the supply will be much greater than the demand at that price; therefore even those of them who would rather pay that price than go unserved, wait, and by waiting they help to bring the price down. On the other hand, when the price is much below 36s. even those sellers who would rather take the price than leave the market with their corn unsold, may argue that at that price the demand will be in excess of the supply: so they wait, and by waiting help to bring the price up.

The price of 36s. has thus a claim to be called the true equilibrium price: because if it were fixed on at the beginning, and adhered to throughout, it would exactly equate demand and supply (i.e. the amount which buyers were willing to purchase at that price would be just equal to that for which sellers were willing to take that price); and because every dealer who has a perfect knowledge of the circumstances of the market expects that price to be established. If he sees the price differing much from 36s. he expects that a change will come before long, and by anticipating it he helps it to come quickly'.

1 But in this case there is a latent assumption, which may be mischievous if not noticed, that the marginal utility of money to the several dealers does not appreciably change during the dealing. This is generally true in a cornmarket, but in a labour market the exceptions are often of great practical importance. See Principles V. II. on this subject and for a "Note on Barter."

CHAPTER III.

EQUILIBRIUM OF NORMAL DEMAND AND SUPPLY.

§ 1. EVEN in the corn-exchange of a country town on a market-day the equilibrium price is affected by Transition calculations of the future relations of production from market to normal price. and consumption; while in the leading cornmarkets of America and Europe dealings for future delivery already predominate and are rapidly weaving into one web all the leading threads of trade in corn throughout the whole world. If it is thought that the growers of any kind of grain in any part of the world have been losing money, and are likely to sow a less area for a future harvest, it is argued that prices are likely to rise as soon as that harvest comes into sight; anticipations of that rise will exercise an influence on present sales for future delivery, and that in its turn influences cash prices; so that these prices are indirectly affected by estimates of the expenses of producing further supplies.

But in this and the following chapters we are specially concerned with movements of price ranging over still longer periods than those for which the most far-sighted dealers in futures generally make their reckoning: we have to consider the volume of production adjusting itself to the conditions of the market, and the normal price being thus determined at the position of stable equilibrium of normal demand and normal supply.

§ 2. We may take up the discussion of the analogy between the supply price and the demand price The account of a commodity at the point at which we left it of supply price when, for the moment assuming that the effici- further.

carried a little

ency of production depended solely upon the exertions of the workers, we said "the price required to call forth the exertion necessary for producing any given amount of a commodity may be called the supply price for that amount'." But now we have to take account of the fact that the production of a commodity generally requires many different kinds of labour and the use of capital in many forms. The exertions of all the different kinds of labour that are directly or indirectly involved in making it; together with the abstinences or rather the waitings required for saving the capital used in making it all these efforts and sacrifices together will be called its REAL COST OF PRODUCTION. The sums Money Cost of of money that have to be paid for these efforts and sacrifices will be called either its MONEY COST OF PRODUCTION, or, for shortness, its EXPENSES OF Expenses of PRODUCTION; they are the prices which have to Production. be paid in order to call forth an adequate supply of the efforts and waitings that are required for making it; or, in other words, they are its supply price'.

Real and

Production.

The analysis of the Expenses of Production of a commodity might be carried backward to any length; but it is seldom worth while to go back very far. We may then arrange the things that are required for making a commodity into whatever groups are convenient, and call them its Factors of pro- FACTORS OF PRODUCTION. Its expenses of production when any given amount of it is produced are thus the supply prices of the corresponding quantities of its factors of production. And the sum of these is the supply price of that amount of the commodity.

duction.

1 Book IV. Ch. 1. § 1.

2 Mill and some other economists have followed the practice of ordinary life in using the term Cost of Production in two senses, sometimes to signify the difficulty of producing a thing, and sometimes to express the outlay of money that has to be incurred in order to induce people to overcome this difficulty and produce it. But by passing from one use of the term to the other without giving explicit warning, they have led to many misunderstandings and much barren controversy.