The Principles of Political Economy
by John Stuart Mill

Book 3
Chapter 2

Of Demand and Supply in Their Relation to Value

    1. That a thing may have any value in exchange, two conditions are necessary. It must be of some use; that is (as already explained) it must conduce to some purpose, satisfy some desire. No one will pay a price, or part with anything which serves some of his purposes, to obtain a thing which serves none of them. . .
    As was pointed out in the last chapter, the utility of a thing in the estimation of the purchaser, is the extreme limit of its exchange value: higher the value cannot ascend; peculiar circumstances are required to raise it so high. This topic is happily illustrated by Mr. De Quincey. "Walk into almost any possible shop, buy the first article you see; what will determine its price? In the ninety-nine cases out of a hundred, simply the element D -- difficulty of attainment. The other element U, or intrinsic utility, will be perfectly inoperative. . . But still not the less, though U is inoperative, can U be supposed absent? By no possibility; for, if it had been absent, assuredly you would not have bought the article even at the lowest price. U acts upon you, though it does not act upon the price. and ultimate gradation. . ."
   

    The supply of a commodity is an intelligible expression: it means the quantity offered for sale; the quantity that is to be had, at a given time and place, by those who wish to purchase it. But what is meant by the demand? Not the mere desire for the commodity. A beggar may desire a diamond; but his desire, however great, will have no influence on the price. Writers have therefore given a more limited sense to demand, and have defined it, the wish to possess, combined with the power of purchasing.  To distinguish demand in this technical sense, from the demand which is synonymous with desire, they call the former effectual demand. After this explanation, it is usually supposed that there remains no further difficulty, and that the value depends upon the ratio between the effectual demand, as thus defined, and the supply.

    These phrases, however, fail to satisfy any one who requires clear ideas, and a perfectly precise expression of them. Some confusion must always attach to a phrase so inappropriate as that of a ratio between two things not of the same denomination. What ratio can there be between a quantity and a desire, or even a desire combined with a power? A ratio between demand and supply is only intelligible if by demand we mean the quantity demanded,

and if the ratio intended is that between the quantity demanded and the quantity supplied. But again, the quantity demanded is not a fixed quantity, even at the same time and place; it varies according to the value; if the thing is cheap, there is usually a demand for more of it than when it is dear. The demand, therefore, partly depends on the value. But it was before laid down that the value depends on the demand. From this contradiction how shall we extricate ourselves? How solve the paradox, of two things, each depending upon the other? . . .

 

    4. Meaning, by the word demand, the quantity demanded, and remembering that this is not a fixed quantity, but in general varies according to the value, let us suppose that the demand at some particular time exceeds the supply, that is, there are persons ready to buy, at the market value, a greater quantity than is offered for sale. Competition takes place on the side of the buyers, and the value rises . . .  At what point, then, will the rise be arrested?

At the point, whatever it be, which equalizes the demand and the supply . . .

    Thus we see that the idea of a ratio, as between demand and supply, is out of place, and has no concern in the matter: the proper mathematical analogy is that of an equation. Demand and supply, the quantity demanded and the quantity supplied, will be made equal. If unequal at any moment, competition equalizes them, and the manner in which this is done is by an adjustment of the value. . .

 

Book 3: Distribution
Chapter 16

Of Some Peculiar Cases of Value

    It sometimes happens that two different commodities have what may be termed a joint cost of production. They are both products of the same operation, or set of operations, and the outlay is incurred for the sake of both together, not part for one and part for the other. The same outlay would have to be incurred for either of the two, if the other were not wanted or used at all. There are not a few instances of commodities thus associated in their production. For example, coke and coal-gas are both produced from the same material, and by the same operation. In a more partial sense, mutton and wool are an example: beef, hides, and tallow: calves and dairy produce: chickens and eggs. Cost of production can have nothing to do with deciding the value of the associated commodities relatively to each other. It only decides their joint value. The gas and the coke together have to repay the expenses of their production, with the ordinary profit. . . . Cost of production does not determine their prices, but the sum of their prices. A principle is wanting to apportion the expenses of production between the two.
    Since cost of production here fails us, we must revert to a law of value anterior to cost of production, and more fundamental, the law of demand and supply. . . .

 

. . . Equilibrium will be attained when the demand for each article fits so well with the demand for the other, that the quantity required of each is exactly as much as is generated in producing the quantity required of the other. If there is any surplus or deficiency on either side; if there is a demand for coke, and not a demand for all the gas produced along with it, or vice versa; the values and prices of the two things will so readjust themselves that both shall find a market. . .

 

The Principles of Economics
by Alfred Marshall

Book V

General Relations of Demand, Supply and Value

CHAPTER 6, §4

     4. We may now pass to consider the case of joint products: i.e. of things which cannot easily be produced separately; but are joined in a common origin, and may therefore be said to have a joint supply, such as beef and hides, or wheat and straw.  This case corresponds to that of things which have a joint demand, and it may be discussed almost in the same words, by merely substituting "demand" for "supply," and vice versa. As there is a joint demand for things joined in a common destination: so there is a joint supply of things which have a common origin. The single supply of the common origin is split up into so many derived supplies of the things that proceed from it.*

 

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*. If it is desired to isolate the relations of demand and supply for a joint product . . . Other things must be assumed to be equal (that is, the supply schedule for the whole process of production must be assumed to remain in force and so must the demand schedule for each of the joint products except that to be isolated). The derived supply price is then found by the rule that it must equal the excess of the supply price for the whole process of production over the sum of the demand prices of all the other joint products; the prices being taken throughout with reference to corresponding amounts.

We must again illustrate by a simple example in which it is assumed that the relative amounts of the two joint products are unalterable. Let SS' be the supply curve for bullocks which yield meat and leather in fixed quantities; dd' the demand curve for their carcases, that is, for the meat derived from them. . . .



Essays on Some Unsettled
Questions of Political Economy

by John Stuart Mill (1844)

It is established, that the advantage which two countries derive from trading with each other, results from the more advantageous employment which thence arises, of the labour and capital—for shortness let us say the labour—of both jointly. The circumstances are such, that if each country confines itself to the production of one commodity, there is a greater total return to the labour of both together; and this increase of produce forms the whole of what the two countries taken together gain by the trade.

    It is the purpose of the present essay to inquire, in what proportion the increase of produce, arising from the saving of labour, is divided between the two countries.

    This question was not entered into by Mr. Ricardo, whose attention was engrossed by far more important questions…

    The problem is, what are the causes which determine the proportion in which the cloth of England and the linen of Germany will exchange for each other?

    This, therefore, is a question concerning exchangeable value. There must be something which determines how much of one commodity another commodity will purchase; and there is no reason to suppose that the law of exchangeable value is more difficult of ascertainment in this case than in other cases.

    The law, however, cannot be precisely the same as in the common cases. When two articles are produced in the immediate vicinity of one another, so that, without expatriating himself, or moving to a distance, a capitalist has the choice of producing one or the other, the quantities of the two articles which will exchange for each other will be, on the average, those which are produced by equal quantities of labour. But this cannot be applied to the case where the two articles are produced in two different countries; because men do not usually leave their country, or even send their capital abroad, for the sake of those small differences of profit which are sufficient to determine their choice of a business, or of an investment, in their own country and neighbourhood.

    The principle, that value is proportional to cost of production, being consequently inapplicable, we must revert to a principle anterior to that of cost of production, and from which this last flows as a consequence,—namely, the principle of demand and supply…

    It may be considered, therefore, as established, that when two countries trade together in two commodities, the exchangeable value of these commodities relatively to each other will adjust itself to the inclinations and circumstances of the consumers on both sides, in such manner that the quantities required by each country, of the article which it imports from its neighbour, shall be exactly sufficient to pay for one another. As the inclinations and circumstances of consumers cannot be reduced to any rule, so neither can the proportions in which the two commodities will be interchanged. We know that the limits within which the variation is confined are the ratio between their costs of production in the one country, and the ratio between their costs of production in the other. Ten yards of cloth cannot exchange for more than 20 yards of linen, nor for less than 15. But they may exchange for any intermediate number. The ratios, therefore, in which the advantage of the trade may be divided between the two nations, are various. The circumstances on which the proportionate share of each country more remotely depends, admit only of a very general indication.

    It is even possible to conceive an extreme case, in which the whole of the advantage resulting from the interchange would be reaped by one party, the other country gaining nothing at all…

    But in general there will not be this extreme inequality in the degree in which the demand in the two countries varies with variations in the price. The advantage will probably be divided equally, oftener than in any one unequal ratio that can be named; though the division will be much oftener, on the whole, unequal than equal.

   
[For the graphical exposition of Mill's reciprocal demand thoeory, developed later by Alfred Marshall and Frances Edgeworth, look here].