2.08. Stock and the Total Demand to Hold

0:008. Stock and the Total Demand to Hold There is another way of treating supply and demand schedules, which, for some problems of analysis, is more useful than the schedules presented earlier. At any point on the market, suppliers are engaged in offering some of their stock of the good and withholding their offer of the remainder. Thus, at a price of 86, suppliers supply three horses on the market and withhold the other five in their stock. This withholding is caused by one of the factors mentioned as possible costs of the exchange. Either the direct use of the good, say the horse, has greater utility than the receipt of the fish in direct use.

0:50Or else, the horse could be exchanged for some other good. Or, finally, the seller expects the final price to be higher so that he can profitably delay the sale. The amount that sellers will withhold on the market is termed their reservation demand. This is not, like the demand studied previously, a demand for a good in exchange. This is a demand to hold stock. Thus, the concept of a demand to hold a stock of goods will always include both demand factors. It will include the demand for the good in exchange by non-possessors, plus the demand to hold the stock by the possessors.

1:36The demand for the good in exchange is also a demand to hold, since, regardless of what What the buyer intends to do with the good in the future, he must hold the good from the time it comes into his ownership and possession by means of exchange. We therefore arrive at the concept of a total demand to hold for a good, differing from the previous concept of exchange demand, although including the latter in addition to the reservation demand by the sellers. If we know the total stock of the good in existence, here eight horses, we may by inspecting the supply and demand schedules arrive at a total demand to hold, or total demand schedule for the market.

2:26For example, at a price of 82, nine horses are demanded by the buyers in exchange, and And eight minus one equals seven horses are withheld by the sellers, that is, demanded to be held by the sellers. Therefore, the total demand to hold horses on the market is nine plus seven equals sixteen horses. On the other hand, at the price of ninety-seven, no horses are withheld by sellers, whose reservation Reservation demand is therefore zero, while the demand by buyers is two. Total demand to hold at this price is zero plus two equals two horses.

3:13It is clear that the demand schedule increases or remains the same as the price falls, while the reservation demand schedule of the sellers also tends to increase as the price falls. The total demand schedule is the result of adding the two schedules. Clearly, the reservation demand of the sellers increases as the price falls for this reason. With a lower price, the value of the purchased good in direct use or in other and future exchanges relatively increases, and therefore the seller tends to withhold more of the good from exchange. Another point of interest is that at the equilibrium price, the total demand to hold is equal to the total stock in existence.

4:04Thus, the equilibrium price not only equates the supply and demand on the market, it also equates the stock of a good to be held with the desire of people to hold it, buyers and sellers included. It is clear that the market always tends to set the price of a good so as to equate the stock with the total demand to hold the stock. Suppose that the price of a good is higher than this equilibrium price. Say that the price is 92, at which the stock is 8 and the total demand to hold is 4. This means 4 horses exist which their possessors do not want to possess. It is clear that someone must possess this stock, since all goods must be property, otherwise they would not be objects of human action.

4:59Since all the stock must at all times be possessed by someone, the fact that the stock is greater than total demand means that there is an imbalance in the economy, that some of the possessors are unhappy with their possession of the stock. They tend to lower the price in order to sell the stock, and the price falls until finally the stock is equated with the demand to hold. Conversely, suppose that the price is below equilibrium, say at 85, where 13 horses are demanded compared to a stock of 8. The bids of the eager non-possessors for the scarce stock push up the price until it reaches Equilibrium In cases where individuals correctly anticipate the equilibrium price, the speculative element will tend to render the total demand even more elastic and flatter.

5:58At a higher than equilibrium price, few will want to keep the stock, the buyers will demand very little, and the sellers will be eager to dispose of the good. On the other hand, at a lower price, the demand to hold will be far greater than the stock. Buyers will demand heavily, and sellers will be reluctant to sell their stock. The discrepancies between total demand and stock will be far greater, and the underbidding and overbidding will more quickly bring about the equilibrium price. We have seen that at the equilibrium price, the most capable or most urgent buyers made the exchanges with the most capable sellers. Here we see that the result of the exchange process is that the stock finally goes into the hands of the most capable possessors.

6:52We remember that in the sale of the 8 horses, the most capable buyers, X1 through X5, purchased from the most capable sellers of the good, Z1 through Z5. At the conclusion of the exchange, then, the possessors are X1 through X5, and the excluded sellers, Z6 through Z8. It is these individuals who finish by possessing the eight horses, and these are the most capable possessors. The price of 89 barrels of fish per horse, these were the ones who preferred the horse on their value scales to 89 barrels of fish, and they acted on the basis of this preference.

7:38For five of the individuals, this meant exchanging their fish for a horse. For three, it meant refusing to part with their horses for the fish. The other nine individuals on the market were the less capable possessors, and they concluded by Possessing the Fish instead of the Horse, even if they started by possessing horses. These were the ones who ranked 89 barrels of fish above one horse on their value scale. Five of these were original possessors of horses who exchanged them for fish. Four simply retained the fish without purchasing a horse. The total demand stock analysis is a useful twin companion to the supply-demand analysis.

8:27Each has advantages for use in different spheres. One relative defect of the total demand stock analysis is that it does not reveal the differences between the buyers and the sellers. In considering total demand, it abstracts from actual exchanges, and therefore does It does not determine the quantity of exchanges, it reveals only the equilibrium price, without demonstrating the equilibrium quantity exchanged. However, it focuses more sharply on the fundamental truth that price is determined solely by utility. We see that the fundamental determinants of price are the value scales of all individuals, buyers and sellers in the market, – and that the physical stock simply assumes its place on these scales.

9:21It is clear in these cases of direct exchange of useful goods that even if the utility of goods for buyers or sellers is at present determined by its subjective exchange value for the individual, the sole ultimate source of utility of each good is its direct use value. If the major utility of a horse to its possessor is the fish or the cow that he can procure in exchange, and the major value of the latter to their possessors is the horse obtainable in exchange, etc., the ultimate determinant of the utility of each good is its direct use value to its individual consumer.