The Influence Of Demand And Supply On Prices
Table of Contents
The [natural] price of commodities is regulated by the cost of production, not by the proportion between the supply and demand.
The proportion between supply and demand might affect the market value of a commodity until it is supplied to match the changing demand.
But this effect will be only temporary.
Reduce the cost of hat production and their price will ultimately fall to their new natural price.
This is even if the demand is quadrupled.
Reduce the cost of natural price of food, then wages will ultimately fall, despite the rapidly increasing demand for labourers.
The opinion that the [market] price of commodities depends solely on demand to supply has been the source of much error in the political economy.
This is why Buchanan has said that:
- [market price] wages are not influenced by a rise or fall in the price of provisions, but solely by the demand and supply of labour
- a tax on the [market price] wages of labour would not raise wages, because it would not change the proportion of the demand of labourers to the supply.
The demand for a commodity cannot increase if no additional quantity of it be purchased or consumed.
Yet under such circumstances its money value may rise.
Thus, if the value of money were to fall, the price of every commodity would rise, for each of the competitors would be willing to spend more money than before on its purchase.
But though its price rose 20%, if no more were bought than before, I think it would not be correct to say that the variation in the price of the commodity was caused by the increased demand for it.
Its natural price, its money cost of production, would be really altered by the altered value of money.
Without any increase of demand, the price of the commodity would be naturally adjusted to that new value.
The cost of production determines the lowest price to which things can fall. The price below which they cannot remain for any length of time, because production would then be either entirely stopped or diminished. Vol. ii. p. 26.
He says that the demand for gold having increased in a still greater proportion than the supply, since the discovery of the mines,
“its price in goods, instead of falling in the proportion of ten to one, fell only in the proportion of four to one;” that is to say, instead of falling in proportion as545 its natural price had fallen, fell in proportion as the supply exceeded the demand.48 “The value of every commodity rises always in a direct ratio to the demand, and in an inverse ratio to the supply.”
The same opinion is expressed by the Earl of Lauderdale.
“With respect to the variations in value, of which every thing valuable is susceptible, if we could for a moment suppose that any
Let us suppose that every substance has intrinsic and fixed value that renders a quantity of it constantly of an equal value under all circumstances. If so, then the value of all things by such a fixed standard would vary according to the proportion between its actual quantity and the demand for them.
Every commodity would thus vary in its value, from 4 different circumstances.
- An increase of its value from a reduction of its quantity
- A reduction of its value from an augmentation of its quantity
- An increase in its value from the increased demand
- A reduction of its value by a failure of demand
Thus, no commodity can possess fixed and intrinsic value so as to qualify it for a measure of the value of other commodities. Mankind selects, as a practical measure of value, that which appears the least liable to any of these 4 sources of variations of value.
Commodities value in 8 different contingencies.
-
From the four circumstances above stated, in relation to the commodity of which we mean to express the value.
-
From the same four circumstances, in relation to the commodity we have adopted as a measure of value.
This is true of:
- monopolized commodities and
- the market price of commodities for a limited period
If the demand for hats doubles, the price would immediately rise. But that rise would be only temporary, unless the cost of production of hats, or their natural price, were raised.
If the natural price of bread should fall 50% from some great discovery in the science of agriculture, the demand would not greatly increase, for no man would desire 548more than would satisfy his wants, and as the demand would not increase, neither would the supply; for a commodity is not supplied merely because it can be produced, but because there is a demand for it. Here then we have a case where the supply and demand have scarcely varied, or if they have increased they have increased in the same proportion; and yet the price of bread will have fallen 50% at a time too when the value of money had continued invariable.
Commodities which are monopolized, either by an individual, or by a company, vary according to the law which Lord Lauderdale has laid down: they fall in proportion as the sellers augment their quantity, and rise in proportion to the eagerness of the buyers to purchase them; their price has no necessary connexion with their natural value: but the prices of commodities, which are subject to competition, and whose quantity may be increased in any moderate degree, will ultimately depend, not on the state of demand and supply, but on the increased or diminished cost of their production.