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potential demand in a particular market at a particular time, and the curve SS' represents the potential supply, the price which would be fixed by the free working of competitive forces would be PM, located at the point where the two curves cross. At this point demand and supply are equal, both being represented by OM. It is impossible that the price should be fixed at any other point, M'P', for example. For if M"Q be drawn so as to equal M'P', it will be evident that at this price OM" units will be demanded, while only OM' units will be supplied. Most of the buyers, however, are willing to pay more than M'P' if necessary, so that in order to secure their share they will bid the price up until the supply equals the demand. This is what John Stuart Mill meant when he said that "value always adjusts itself in such a manner that the demand is equal to the supply,”. a statement which has often been misinterpreted, and consequently unjustifiably criticised.

Producers' Surplus. — Just as the area APD (Fig. 5) has sometimes been considered, not altogether accurately, to represent a "Consumers' Surplus" (of utility over costs), so the area APS has been considered to correspond to what has been called "Producers' Surplus" or "Sellers' Gains." This surplus should not be thought of as corresponding to the actual profits of the sellers; that is, as being in any way a surplus of value over and above the expenses of production. It cannot be too strongly emphasized that the analysis of demand and supply thus far presented relates only to the conditions existing in a particular market at a particular time. All that we can say is that when OM units are sold at the price of MP per unit, the total receipts of the sellers are represented by the rectangle OMPA; while the area OMPS represents what they would have been willing to sell the same amount of goods for, had they not been able to get a larger return. There is, as we shall see, a relation between the prices of things and the expense of producing them, when a considerable period of time is taken into consideration. At any given time, however, sellers are mainly governed by the relative profitableness of selling at existing prices or waiting for higher ones. The only kind of surplus which the area APS represents is an intangible, hypothetical thing.

QUESTIONS

1. Is there such a thing as "intrinsic value"? What is usually meant when the expression is used?

2. How would you apply the concept of marginal utility to a non-divisible good, like a house?

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3. Does the tendency of each individual to maintain the equilibrium of his margin of consumption result in the maximum satisfaction of his wants? 4. What relation is there between the amounts which a college student pays for room rent, for food, for clothing, for books, and for athletics?

5. Which of your customary purchases would you still make if prices were doubled? Which would you curtail? Which would you omit? 6. Illustrate the propositions relating to elasticity of demand (p. 164) by concrete examples.

REFERENCES

BÖHM-BAWERK, E. VON. Positive Theory of Capital, Book IV, Chaps.

I-VI.

CARVER, T. N. Distribution of Wealth, Chap. I.

CUNYNGHAME, HENRY. Geometrical Political Economy, Chaps. III and IV.
HADLEY, A. T. Economics, Chap. III.

HOBSON, J. A. Economics of Distribution, Chaps. I and II.

MARSHALL, ALFRED. Principles of Economics, 4th ed., Book III and Book
V, Chaps. I and II. Or [abridged] Economics of Industry, 3d ed.,
Book III and Book V, Chaps. I and II.

MILL, J. S. Principles of Political Economy, Book III, Chaps. I and II.
WIESER, F. VON. Natural Value, Book II, Chaps. I–V.

Begin.

CHAPTER XII

VALUE AND PRICE (Continued)

SOME of the most important factors in the determination of exchange values are not revealed by an analysis of the conditions existing at a particular time. We have assumed, for example, an existing potential demand and an existing potential supply, and have shown how these result in the equilibrium of actual demand and supply at a certain price. An explanation of why potential demand and potential supply are as they are necessitates taking a considerable period of time into consideration. The demand side of this particular problem need not detain us. It has already been suggested that demand will change with changes in incomes, tastes, fashions, and the like. The effect of these influences is so obvious that it may be taken for granted. With reference to the other side of the problem, however, it has been pointed out that the potential supply of the present is limited by conditions set by past industry. The amounts of different kinds of consumption goods that are ready for present use depends upon the direction which the work of production has taken in the past. What, in the long run, is the relation between supply and value? To answer this question we shall have to push our analysis somewhat farther.

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Normal Value. The dominant motive that guides farmers and business men in their investments of labor and capital is the desire for money profits. By profits we mean in this connection the difference between the expense involved in producing goods and the money that can be obtained for them. If it were always an easy matter for business men to change their interests and their energies from one line of production to another, and if capital and labor could likewise be freely transferred from one undertaking to another, it is hard to see how profits in any one competitive business could be for any length of time much higher

toward those employments The effect would be a conadvantage in different lines

than in other competitive businesses. Managerial ability, labor, and capital would gravitate always which promise the greatest profits. tinual tendency toward equality of of business. This does not mean necessarily an equality of profits as between individuals in any given line of business, for the amount of profits depends largely upon the skill and enterprise of the individual business man. In a state of free competition, with managerial ability as free in its selection of opportunities as we have assumed, the profits of any business would hardly be larger, for any period of time, than the business man could get as salary by working for others for if working for others offered a greater return than assuming the risks of business for himself, he would naturally choose the salaried position, and vice versa. Purely competitive profits, under conditions of absolute "fluidity" of business ability, of labor, and of capital, would thus tend to adjust themselves according to the ability of the individual business man; that is, to equal what we shall later describe as the "wages of management." If we include the value of the business man's services among the expenses of production, we may, obviously, state the tendency which we have described as a tendency toward the equality of the prices received for the products of any particular business and the expenses of producing them.

The assumptions we have made do not, however, exactly correspond to the conditions of actual business. Managerial ability, labor, and capital are all specialized to a greater or less extent, so that they cannot be changed from one employment to another without loss of efficiency. But it is not necessary for the validity of our analysis that all managerial ability, all labor, and all capital should be fluid enough to change from industry to industry economically. There are always a certain number of business men who are anxiously watching for the most inviting business opportunities; there is always a certain amount of labor awaiting the most remunerative employment, and there is always a certain amount of money awaiting investment in those forms of capital goods which produce the greatest value. These facts

are enough to give substantial truth to the statement that in any competitive industry the price of the commodity produced tends to equal the cost of producing it. When the price of bicycles was high, as compared with the expense of producing them, existing bicycle factories were extended and new ones were built. The supply of bicycles was thus so increased that they could not be sold except at a much lower price. On this account and because of the cessation of demand, the profits in the manufacture of bicycles became relatively low, and many former bicycle factories are now used for other purposes. If the excess of the price of wheat over the expense of producing it promises to be greater than the excess of the price of corn over the expense of producing it, farmers will raise less corn and more wheat, and the result will be higher prices for corn and lower prices for wheat.

On account of this tendency of prices to equal the expenses of production, the expense of producing a unit of a commodity is called its normal value. It must be clearly understood that normal values relate only to a tendency-not to the actual prices of the market.

Different Conditions of Supply. The strength of the tendency of actual competitive values to equal normal values depends upon the length of the period of time that is taken into consideration. The longer the period of time, the larger will be the proportion of managerial ability, labor, and capital that can be transferred from one industry to another. To build and to equip new factories and to extend old ones takes time; the supply of skilled labor in any occupation can often be increased but slowly, for many trades involve an apprenticeship of three or more years. In the undertakings that are becoming less profitable, although capital specialized in the form of machines may not be useful for other purposes, yet such machines need not be replaced as they wear out; while a skilled laborer cannot take up another trade without loss of efficiency, yet the incoming supply of laborers may begin their apprenticeship in those occupations in which there is a greater demand for labor.

While the conditions of long-period supply are thus such as to result in a constant tendency toward the equalization of normal

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