The Principles of Political Economy
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. . .
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
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.
. . . 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
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.*
*. 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.
Essays on Some Unsettled
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.