Principles of Economics:
An Introductory Volume

by Alfred Marshall

1890

BOOK I
Chapter 1
Introduction

 p. 1a

    1. Political economy or economics is a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of wellbeing. . .

p. 2c
    [T]here are vast numbers of people both in town and country who are brought up with insufficient food, clothing, and house-room; whose education is broken off early in order that they may go to work for wages; who thenceforth are engaged during long hours in exhausting toil with imperfectly nourished bodies, and have therefore no chance of developing their higher mental faculties. Their life is not necessarily unhealthy or unhappy. Rejoicing in their affections towards God and man, and perhaps even possessing some natural refinement of feeling, they may lead lives that are far less incomplete than those of many, who have more material wealth. But, for all that, their poverty is a great and almost unmixed evil to them. Even when they are well, their weariness often amounts to pain, while their pleasures are few; and when sickness comes, the suffering caused by poverty increases tenfold. . .

p. 3b
    2. Slavery was regarded by Aristotle as an ordinance of nature, and so probably was it by the slaves themselves in olden time. The dignity of man was proclaimed by the Christian religion: it has been asserted with increasing vehemence during the last hundred years: but, only through the spread of education during quite recent times, are we beginning to feel the full import of the phrase. Now at last we are setting ourselves seriously to inquire whether it is necessary that there should be any so-called "lower classes" at all . . .
    The hope that poverty and ignorance may gradually be extinguished, derives indeed much support from the steady progress of the working classes during the nineteenth century. The steam-engine has relieved them of much exhausting and degrading toil; wages have risen; education has been improved and become more general; the railway and the printing-press have enabled members of the same trade in different parts of the country to communicate easily with one another, and to undertake and carry out broad and far-seeing lines of policy . . .

p. 13a
    Intermediate between these two extremes are the great body of economists who, working on parallel lines in many different countries, are bringing to their studies an unbiassed desire to ascertain the truth, and a willingness to go through with the long and heavy work by which alone scientific results of any value can be obtained. Varieties of mind, of temper, of training and of opportunities lead them to work in different ways, and to give their chief attention to different parts of the problem. All are bound more or less to collect and arrange facts and statistics relating to past and present times; and all are bound to occupy themselves more or less with analysis and reasoning on the basis of those facts which are ready at hand: but some find the former task the more attractive and absorbing, and others the latter. This division of labour, however, implies not opposition, but harmony of purpose. The work of all adds something or other to that knowledge, which enables us to understand the influences exerted on the quality and tone of man's life by the manner in which he earns his livelihood, and by the character of that livelihood.

Book I
Chapter 4

The Order and Aims of Economic Studies

p. 38b
    Economic laws are statements with regard to the tendencies of man's action under certain conditions. They are hypothetical only in the same sense as are the laws of the physical sciences: for those laws also contain or imply conditions. But there is more difficulty in making the conditions clear, and more danger in any failure to do so, in economics than in physics. The laws of human action are not indeed as simple, as definite or as clearly ascertainable as the law of gravitation; but many of them may rank with the laws of those natural sciences which deal with complex subject-matter. . .

p. 41b

The following problems seem to be of special urgency now in our own country. --
    How should we act so as to increase the good and diminish the evil influences of economic freedom, both in its ultimate results and in the course of its progress? If the first are good and the latter evil, but those who suffer the evil, do not reap the good; how far is it right that they should suffer for the benefit of others?
    Taking it for granted that a more equal distribution of wealth is to be desired, how far would this justify changes in the institutions of property, or limitations of free enterprise even when they would be likely to diminish the aggregate of wealth? . . .

    Ought we to rest content with the existing forms of division of labour? Is it necessary that large numbers of the people should be exclusively occupied with work that has no elevating character? Is it possible to educate gradually among the great mass of workers a new capacity for the higher kinds of work; and in particular for undertaking co-operatively the management of the business in which they are themselves employed?
    What are the proper relations of individual and collective action in a stage of civilization such as ours? How far ought voluntary association in its various forms, old and new, to be left to supply collective action for those purposes for which such action has special advantages? What business affairs should be undertaken by society itself acting through its government, imperial or local? Have we, for instance, carried as far as we should the plan of collective ownership and use of open spaces, of works of art, of the means of instruction and amusement, as well as of those material requisites of a civilized life, the supply of which requires united action, such as gas and water, and railways?
    When government does not itself directly intervene, how far should it allow individuals and corporations to conduct their own affairs as they please? How far should it regulate the management of railways and other concerns which are to some extent in a position of monopoly, and again of land and other things the quantity of which cannot be increased by man? . . .
    Are the prevailing methods of using wealth entirely justifiable? What scope is there for the moral pressure of social opinion in constraining and directing individual action in those economic relations in which the rigidity and violence of government interference would be likely to do more harm than good? In what respect do the duties of one nation to another in economic matters differ from those of members of the same nation to one another?

P. 43c
    The natural sciences and especially the physical group of them have this great advantage as a discipline over all studies of man's action, that in them the investigator is called on for exact conclusions which can be verified by subsequent observation or experiment. . .
    In sciences that relate to man exactness is less attainable. . . The scientific student of history is hampered by his inability to experiment and even more by the absence of any objective standard to which his estimates of relative proportion can be referred. . . The economist also is hampered by this difficulty, but in a less degree than other students of man's action; for indeed he has some share in those advantages which give precision and objectivity to the work of the physicist. . .

 

p. 44c

    In smaller matters, indeed, simple experience will suggest the unseen. . . But greater effort, a larger range of view, a more powerful exercise of the imagination are needed in tracking the true results of, for instance, many plausible schemes for increasing steadiness of employment. For that purpose it is necessary to have learnt how closely connected are changes in credit, in domestic trade, in foreign trade competition, in harvests, in prices; and how all of these affect steadiness of employment for good and for evil. It is necessary to watch how almost every considerable economic event in any part of the Western world affects employment in some trades at least in almost every other part. If we deal only with those causes of unemployment which are near at hand, we are likely to make no good cure of the evils we see; and we are likely to cause evils, that we do not see. And if we are to look for those which are far off and weigh them in the balance, then the work before us is a high discipline for the mind.

p. 47a

     Some harsh employers and politicians, defending exclusive class privileges early in last century, found it convenient to claim the authority of political economy on their side; and they often spoke of themselves as "economists." And even in our own time, that title has been assumed by opponents of generous expenditure on the education of the masses of the people, in spite of the fact that living economists with one consent maintain that such expenditure is a true economy, and that to refuse it is both wrong and bad business from a national point of view. But Carlyle and Ruskin, followed by many other writers who had no part in their brilliant and ennobling poetical visions, have without examination held the great economists responsible for sayings and deeds to which they were really averse; and in consequence there has grown up a popular misconception of their thoughts and character.
    The fact is that nearly all the founders of modern economics were men of gentle and sympathetic temper, touched with the enthusiasm of humanity. They cared little for wealth for themselves; they cared much for its wide diffusion among the masses of the people. They opposed antisocial monopolies however powerful. In their several generations they supported the movement against the class legislation which denied to trade unions privileges that were open to associations of employers; or they worked for a remedy against the poison which the old Poor Law was instilling into the hearts and homes of the agricultural and other labourers; or they supported the factory acts, in spite of the strenuous opposition of some politicians and employers who claimed to speak in their name. They were without exception devoted to the doctrine that the wellbeing of the whole people should be the ultimate goal of all private effort and all public policy. But they were strong in courage and caution; they appeared cold, because they would not assume the responsibility of advocating rapid advances on untried paths, for the safety of which the only guarantees offered were the confident hopes of men whose imaginations were eager, but not steadied by knowledge nor disciplined by hard thought.
    Their caution was perhaps a little greater than necessary: for the range of vision even of the great seers of that age was in some respects narrower than is that of most educated men in the present time; when, partly through the suggestions of biological study, the influence of circumstances in fashioning character is generally recognized as the dominant fact in social science. Economists have accordingly now learnt to take a larger and more hopeful view of the possibilities of human progress. They have learnt to trust that the human will, guided by careful thought, can so modify circumstances as largely to modify character; and thus to bring about new conditions of life still more favourable to character; and therefore to the economic, as well as the moral, wellbeing of the masses of the people. Now as ever it is their duty to oppose all plausible short cuts to that great end, which would sap the springs of energy and initiative.
    The rights of property, as such, have not been venerated by those master minds who have built up economic science; but the authority of the science has been wrongly assumed: by some who have pushed the claims of vested rights to extreme and antisocial uses. It may be well therefore to note that the tendency of careful economic study is to base the rights of private property not on any abstract principle, but on the observation that in the past they have been inseparable from solid progress; and that therefore it is the part of responsible men to proceed cautiously and tentatively in abrogating or modifying even such rights as may seem to be inappropriate to the ideal conditions of social life.

Book II
Chapter 3

Production, Consumption, Labour, Necessaries

p. 63a

    1. Man cannot create material things. In the mental and moral world indeed he may produce new ideas; but when he is said to produce material things, he really only produces utilities; . . .
    It is sometimes said that traders do not produce: that while the cabinet-maker produces furniture, the furniture dealer merely sells what is already produced. But there is no scientific foundation for this distinction. They both produce utilities, and neither of them can do more: the furniture-dealer moves and rearranges matter so as to make it more serviceable than it was before, and the carpenter does nothing more.

Book III

Chapter 3

Gradations of Consumers' Demand

p. 93a
    There is an endless variety of wants, but there is a limit to each separate want. This familiar and fundamental tendency of human nature may be stated in the law of satiable wants or of diminishing utility thus:-The total utility of a thing to anyone (that is, the total pleasure or other benefit it yields him) increases with every increase in his stock of it, but not as fast as his stock increases. If his stock of it increases at a uniform rate the benefit derived from it increases at a diminishing rate. In other words, the additional benefit which a person derives from a given increase of his stock of a thing, diminishes with every increase in the stock that he already has. . .

p. 94a
    There is however an implicit condition in this law which should be made clear. It is that we do not suppose time to be allowed for any alteration in the character or tastes of the man himself. It is therefore no exception to the law that the more good music a man hears, the stronger is his taste for it likely to become; . . .
 

p. 94b

    2. Now let us translate this law of diminishing utility into terms of price. Let us take an illustration from the case of a commodity such as tea, which is in constant demand and which can be purchased in small quantities. Suppose, for instance, that tea of a certain quality is to be had at 2s. per lb. A person might be willing to give 10s. for a single pound once a year rather than go without it altogether; while if he could have any amount of it for nothing he would perhaps not care to use more than 30 lbs. in the year. But as it is, he buys perhaps 10 lbs. in the year; that is to say, the difference between the satisfaction which he gets from buying 9 lbs. and I 0 lbs. is enough for him to be willing to pay 2s. for it: while the fact that he does not buy an eleventh pound, shows that he does not think that it would be worth an extra 2s. to him. That is, 2s. a pound measures the utility to him of the tea which lies at the margin or terminus or end of his purchases; it measures the marginal utility to him. If the price which he is just willing to pay for any pound be called his demand price, then 2s. is his marginal demand price. And our law may be worded:-
    The larger the amount of a thing that a person has the less, other things being equal (i.e. the purchasing power of money, and the amount of money at his command being equal), will be the price which he will pay for a little more of it: or in other words his marginal demand price for it diminishes.
    His demand becomes efficient, only when the price which he is willing to offer reaches that at which others are willing to sell.
    This last sentence reminds us that we have as yet taken no account of changes in the marginal utility of money, or general purchasing power. At one and the same time, a person's material resources being unchanged, the marginal utility of money to him is a fixed quantity, so that the prices he is just willing to pay for two commodities are to one another in the same ratio as the utility of those two commodities.
 

p. 96b
    4. To obtain complete knowledge of demand for anything, we should have to ascertain how much of it he would be willing to purchase at each of the prices at which it is likely to be offered; and the circumstance of his demand for, say, tea can be best expressed by a list of the prices which he is willing to pay; . . .

p. 97a
    When we say that a person's demand for anything increases, we mean that he will buy more of it than he would before at the same price, and that he will buy as much of it as before at a higher price. A general increase in his demand is an increase throughout the whole list of prices at which he is willing to purchase different amounts of it, and not merely that he is willing to buy more of it at the current prices.

p. 99a

    The total demand in the place for, say, tea, is the sum of the demands of all the individuals there. Some will be richer and some poorer than the individual consumer whose demand we have just written down; some will have a greater and others a smaller liking for tea than he has. Let us suppose that there are in the place a million purchasers of tea, and that their average consumption is equal to his at each several price. . .
    There is then one general law of demand: -The greater the amount to be sold, the smaller must be the price at which it is offered in order that it may find purchasers; or, in other words, the amount demanded increases with a fall in price, and diminishes with a rise in price. . .

 

BOOK III
Chapter 4
The Elasticity of Wants

p. 102c
    The elasticity (or responsiveness) of demand in a market is great or small according as the amount demanded increases much or little for a given fall in price, and diminishes much or little for a given rise in price.
    2. The price which is so high relatively to the poor man as to be almost prohibitive, may be scarcely felt by the rich; the poor man, for instance, never tastes wine, but the very rich man may drink as much of it as he has a fancy for, without giving himself a thought of its cost. We shall therefore get the clearest notion of the law of the elasticity of demand by considering one class of society at a time. . .
    When the price of a thing is very high relatively to any class, they will buy but little of it; and in some cases custom and habit may prevent them from using it freely even after its price has fallen a good deal. . . The elasticity of demand is great for high prices, and great, or at least considerable, for medium prices; but it declines as the price falls; and gradually fades away if the fall goes so far that satiety level is reached.

p. 105a
    3. There are some things the current prices of which in this country are very low relatively even to the poorer classes; such are for instance salt, and many kinds of savours and flavours, and also cheap medicines. It is doubtful whether any fall in price would induce a considerable increase in the consumption of these.

p. 106b

    4. The case of necessaries is exceptional. When the price of wheat is very high, and again when it is very low, the demand has very little elasticity: at all events if we assume that wheat, even when scarce, is the cheapest food for man; and that, even when most plentiful, it is not consumed in any other way.

p. 107c
    The demand for things of a higher quality depends much on sensibility. some people care little for a refined flavour in their wine provided they can get plenty of it: others crave a high quality, but are easily satiated. . . The effective demand for first-rate music is elastic only in large towns; for second-rate music it is elastic both in large and small towns.

P. 110
    6. Next, allowance must be made for changes in fashion, and taste and habit, for the opening out of new uses of a commodity, for the discovery or improvement or cheapening of other things that can be applied to the same uses with it. In all these cases there is great difficulty in allowing for the time that elapses between the economic cause and its effect. For time is required to enable a rise in the price of a commodity to exert its full influence on consumption. Time is required for consumers to become familiar with substitutes that can be used instead of it, and perhaps for producers to get into the habit of producing them in sufficient quantities. Time may be also wanted for the growth of habits of familiarity with the new commodities and the discovery of methods of economizing them.
    For instance when wood and charcoal became dear in England, familiarity with coal as a fuel grew slowly, fireplaces were but slowly adapted to its use, and an organized traffic in it did not spring up quickly even to places to which it could be easily carried by water. The invention of processes by which it could be used as a substitute for charcoal in manufacture went even more slowly, and is indeed hardly yet complete. . .

p. 111b

    Another difficulty of the same kind arises from the fact that there are many purchases which can easily be put off for a short time, but not for a long time. This is often the case with regard to clothes and other things which are worn out gradually, and which can be made to serve a little longer than usual under the pressure of high prices.

 

BOOK III
Chapter 6
Value and Utility

p. 124a

    1. We may now turn to consider how far the price which is actually paid for a thing represents the benefit that arises from its possession. This is a wide subject on which economic science has very little to say, but that little is of some importance.
    We have already seen that the price which a person pays for a thing can never exceed, and seldom comes up to that which he would be willing to pay rather than go without it: so that the satisfaction which he gets from its purchase generally exceeds that which he gives up in paying away its price; and he thus derives from the purchase a surplus of satisfaction. The excess of the price which he would be willing to pay rather than go without the thing, over that which he actually does pay, is the economic measure of this surplus satisfaction. It may be called consumer's surplus.
    It is obvious that the consumer's surpluses derived from some commodities are much greater than from others. There are many comforts and luxuries of which the prices are very much below those which many people would pay rather than go entirely without them; and which therefore afford a very great consumer's surplus. Good instances are matches, salt, a penny newspaper, or a postage-stamp. . .

p. 125a
    2. In order to give definiteness to our notions, let us consider the case of tea purchased for domestic consumption. Let us take the case of a man, who, if the price of tea were 20s. a pound, would just be induced to buy one pound annually; who would just be induced to buy two pounds if the price were 14s., three pounds if the price were 10s., four pounds if the price were 6s., five pounds if the price were 4s., six pounds if the price were 3s., and who, the price being actually 2s., does purchase seven pounds. We have to investigate the consumer's surplus which he derives from his power of purchasing tea at 2s. a pound. . .

p. 127b

    When at last the price has fallen to 2s. he buys seven pounds, which are severally worth to him not less than 20, 14, 10, 6, 4, 3, and 2s. or 59s. in all. This sum measures their total utility to him, and his consumer's surplus is (at least) the excess of this sum over the 14s. he actually does pay for them, i.e. 45s. This is the excess value of the satisfaction he gets from buying the tea over that which he could have got by spending the 14s. in extending a little his purchase of other commodities, of which he had just not thought it worth while to buy more at their current prices; and any further purchases of which at those prices would not yield him any consumer's surplus. In other words, he derives this 45s. worth of surplus enjoyment from his conjuncture, from the adaptation of the environment to his wants in the particular matter of tea.

p. 132a
    4. The substance of our argument would not be affected if we took account of the fact that, the more a person spends on anything the less power he retains of purchasing more of it or of other things, and the greater is the value of money to him (in the technical language every fresh expenditure increases the marginal value of money to him). But though its substance would not be altered, its form would be made more intricate without any corresponding gain; for there are very few practical problems, in which the corrections to be made under this head would be of any importance.
    There are however some exceptions. For instance, as Sir R. Giffen has pointed out, a rise in the price of bread makes so large a drain on the resources of the poorer labouring families and raises so much the marginal utility of money to them, that they are forced to curtail their consumption of meat and the more expensive farinaceous foods: and, bread being still the cheapest food which they can get and will take, they consume more, and not less of it. But such cases are rare; when they are met with, each must be treated on its own merits.

p. 136a
    In every civilized country there have been some followers of the Buddhist doctrine that a placid serenity is the highest ideal of life; that it is the part of the wise man to root out of his nature as many wants and desires as he can; that real riches consist not in the abundance of goods but in the paucity of wants. At the other extreme are those who maintain that the growth of new wants and desires is always beneficial because it stimulates people to increased exertions. They seem to have made the mistake, as Herbert Spencer says, of supposing that life is for working, instead of working for life.
    The truth seems to be that as human nature is constituted, man rapidly degenerates unless he has some hard work to do, some difficulties to overcome; and that some strenuous exertion is necessary for physical and moral health. The fulness of life lies in the development and activity of as many and as high faculties as possible. . .

 

Book V
Chapter 3
Equilibrium of Normal Demand and Supply

 

p. 153

1. We have next to inquire what causes govern supply prices, that is prices which dealers are willing to accept for different amounts. In the last chapter we looked at the affairs of only a single day. and supposed the stocks offered for sale to be already in existence. But of course these stocks are dependent on the amount of wheat sown in the preceding year; and that, in its turn, was largely influenced by the farmers' guesses as to the price which they would get for it in this year. This is the point at which we have to work in the present chapter. . .

p. 158c

The conditions of normal supply are less definite [than those governing demand, hsg]; and a full study of them must be reserved for later chapters. They will be found to vary in detail with the length of the period of time to which the investigation refers; chiefly because both the material capital of machinery and other business plant, and the immaterial capital of business skill and ability and organization, are of slow growth and slow decay.

Let us call to mind the "representative firm," whose economies of production, internal and external, are dependent on the aggregate volume of production of the commodity that it makes; and, postponing all further study of the nature of this dependence, let us assume that the normal supply price of any amount of that commodity may be taken to be its normal expenses of production (including gross earnings of management) by that firm. That is, let us assume that this is the price the expectation of which will just suffice to maintain the existing aggregate amount of production; some firms meanwhile rising and increasing their output, and others falling and diminishing theirs; but the aggregate production remaining unchanged...

p. 161c
Such an equilibrium is stable; that is, the price, if displaced a little from it, will tend to return, as a pendulum oscillates about its lowest point; and it will be found to be a characteristic of stable equilibria that in them the demand price is greater than the supply price for amounts just less than the equilibrium amount, and vice versa. For when the demand price is greater than the supply price, the amount produced tends to increase.

p. 164a
7. The remainder of the present volume will be chiefly occupied with interpreting and limiting this doctrine that the value of a thing tends in the long run to correspond to its cost of production. In particular the notion of equilibrium, which has been treated rather slightly in this chapter, will be studied more carefully in chapters V and XII of this Book: and some account of the controversy whether "cost of production" or "utility" governs value will be given in Appendix I. But it may be well to say a word or two here on this last point.

We might as reasonably dispute whether it is the upper or the under blade of a pair of scissors that cuts a piece of paper, as whether value is governed by utility or cost of production. It is true that when one blade is held still, and the cutting is effected by moving the other, we may say with careless brevity that the cutting is done by the second; but the statement is not strictly accurate, and is to be excused only so long as it claims to be merely a popular and not a strictly scientific account of what happens. . .

p. 165c
Thus we may conclude that, as a general rule, the shorter the period which we are considering, the greater must be the share of our attention which is given to the influence of demand on value; and the longer the period, the more important will be the influence of cost of production on value. For the influence of changes in cost of production takes as a rule a longer time to work itself out than does the influence of changes in demand. The actual value at any time, the market value as it is often called, is often more influenced by passing events and by causes whose action is fitful and short lived, than by those which work persistently. But in long periods these fitful and irregular causes in large measure efface one another's influence; so that in the long run persistent causes dominate value completely. . .

 

BOOK V
CHAPTER 5
EQUILIBRIUM OF NORMAL DEMAND AND SUPPLY, CONTINUED, WITH REFERENCE TO
LONG AND SHORT PERIODS

 

p. 182a
2. The element of time is a chief cause of those difficulties in economic investigations which make it necessary for man with his limited powers to go step by step; breaking up a complex question, studying one bit at a time, and at last combining his partial solutions into a more or less complete solution of the whole riddle. In breaking it up, he segregates those disturbing causes, whose wanderings happen to be inconvenient, for the time in a pound called Caeteris Paribus. The study of some group of tendencies is isolated by the assumption other things being equal: the existence of other tendencies is not denied, but their disturbing effect is neglected for a time. The more the issue is thus narrowed, the more exactly can it be handled: but also the less closely does it correspond to real life. Each exact and firm handling of a narrow issue, however, helps towards treating broader issues, in which that narrow issue is contained, more exactly than would otherwise have been possible. With each step more things can be let out of the pound; exact discussions can be made less abstract, realistic discussions can be made less inexact than was possible at an earlier stage.(4*)
 
p. 192c
To sum up then as regards short periods. The supply of specialized skill and ability, of suitable machinery and other material capital, and of the appropriate industrial organization has not time to be fully adapted to demand; but the producers have to adjust their supply to the demand as best they can with the appliances already at their disposal. . .

p. 193b

7. In long periods on the other hand all investments of capital and effort in providing the material plant and the organization of a business, and in acquiring trade knowledge and specialized ability, have time to be adjusted to the incomes which are expected to be earned by them: and the estimates of those incomes therefore directly govern supply, and are the true long-period normal supply price of the commodities produced.

 

BOOK V

CHAPTER XII

Equilibrium of Normal Demand and Supply, Continued, With Reference to the Law of Increasing Return

 

p. 271c
Here there is to be noted an important difference between demand and supply. A fall in the price, at which a commodity is offered, acts on demand always in one direction. The amount of the commodity demanded may increase much or little according as the demand is elastic or inelastic: and a long or short time may be required for developing the new and extended uses of the commodity, which are rendered possible by the fall in price. . . .

p. 272b

But there are no such simple rules with regard to supply. An increase in the price offered by purchasers does indeed always increase supply: and thus it is true that, if we have regard to short periods only, and especially to the transactions of a dealer's market, there is an "elasticity of supply" which corresponds closely to elasticity of demand. . . .


In the more fundamental questions which relate to long periods, the matter is even more complex. For the ultimate output corresponding to an unconditional demand at even current prices would be theoretically infinite; and therefore the elasticity of supply of a commodity which conforms to the law of Increasing Return, or even to that of Constant Return, is theoretically infinite for long periods.
 

p. 273c
The causes which govern the facilities for production at the command of a single firm, thus conform to quite different laws from those which control the whole output of an industry. And the contrast is perhaps heightened, when we take the difficulties of marketing into account. For instance manufactures, which are adapted to special tastes, are likely to be on a small scale . . . so that a great increase in their scale of production would be sure to introduce vast economies at once. But these are the very industries in which each firm is likely to be confined more or less to its own particular market: and, if it is so confined, any hasty increase in its production is likely to lower the demand price in that market out of all proportion to the increased economies that it will gain . . .

p. 275b
3. Thus the history of the individual firm cannot be made into the history of an industry any more than the history of an individual man can be made into the history of mankind. And yet the history of mankind is the outcome of the history of individuals; and the aggregate production for a general market is the outcome of the motives which induce individual producers to expand or contract their production. It is just here that our device of a representative firm comes to our aid. We imagine to ourselves at any time a firm that has its fair share of those internal and external economies, which appertain to the aggregate scale of production in the industry to which it belongs. . .

p. 276

This then is the marginal cost on which we fix our eyes. We do not expect it to fall immediately in consequence of a sudden increase of demand. On the contrary we expect the short-period supply price to increase with increasing output. But we also expect a gradual increase in demand to increase gradually the size and the efficiency of this representative firm; and to increase the economies both internal and external which are at its disposal. . .

 

BOOK V
CHAPTER XIII
Theory of Changes of Normal Demand and Supply in
Relation to the Doctrine of  Maximum Satisfaction

 

1. In earlier chapters of this Book, . . . we have considered gradual changes in the adjustment of demand and supply. But any great and lasting change in fashion; any substantive new invention; any diminution of population by war or pestilence; or the development or dwindling away of a source of supply of the commodity in question, or of a raw material used in it, or of another commodity which is a rival and possible substitute for it: -- such a change as any of these may cause the prices set against any given annual (or daily) consumption and production of the commodity to cease to be its normal demand and supply prices for that volume of consumption and production; or, in other words, they may render it necessary to make out a new demand schedule or a new supply schedule, or both of them. We proceed to study the problems thus suggested.

An increase of normal demand for a commodity involves an increase in the price at which each several amount can find purchasers; or, which is the same thing, an increase of the quantity which can find purchasers at any price. This increase of demand may be caused by the commodity's coming more into fashion, by the opening out of a new use for it or of new markets for it, by the permanent falling off in the supply of some commodity for which it can be used as a substitute, by a permanent increase in the wealth and general purchasing power of the community, and so on. Changes in the opposite direction will cause a falling off in demand and a sinking of the demand prices. Similarly an increase of normal supply means an increase of the amounts that can be supplied at each several price, and a diminution of the price at which each separate amount can be supplied. This change may be caused by the opening up of a new source of supply, whether by improved means of transport or in any other way, by an advance in the arts of production, such as the invention of a new process or of new machinery, or again, by the granting of a bounty on production. Conversely, a diminution of normal supply (or a raising of the supply schedule) may be caused by the closing up of a new source of supply or by the imposition of a tax.

p. 279b
2. We have, then, to regard the effects of an increase of normal demand from three points of view, according as the commodity in question obeys the law of constant or of diminishing or of increasing return: that is, its supply price is practically constant for all amounts, or increases or diminishes with an increase in the amount produced. . .

p. 280c
The argument of this section has been thought by some writers to lend support to the claim that a Protective duty on manufactured imports in general increases the home market for those imports; and, by calling into play the Law of Increasing Return, ultimately lowers their price to the home consumer. Such a result may indeed ultimately be reached by a wisely chosen system of "Protection to nascent industries" in a new country; where manufactures, like young children, have a power of rapid growth. But even there the policy is apt to be wrenched from its proper uses, to the enrichment of particular interests . . . while Protection to any one industry nearly always tends to narrow the markets, especially the foreign markets, for other industries. . .

p. 288b
In the case then of commodities with regard to which the law of increasing return acts at all sharply, or in other words, for which the normal supply price diminishes rapidly as the amount produced increases, the direct expense of a bounty sufficient to call forth a greatly increased supply at a much lower price, would be much less than the consequent increase of consumers' surplus. And if a general agreement could be obtained among consumers, terms might be arranged which would make such action amply remunerative to the producers, at the same time that they left a large balance of advantage to the consumers.

P. 291c
These conclusions, it will be observed, do not by themselves afford a valid ground for government interference. But they show that much remains to be done, by a careful collection of the statistics of demand and supply, and a scientific interpretation of their results, in order to discover what are the limits of the work that society can with advantage do towards turning the economic actions of individuals into those channels in which they will add the most to the sum total of happiness.