2.09. Continuing Markets and Changes in Price

0:009. Continuing Markets and Changes in Price How then may we sum up the analysis of our hypothetical horse and fish market? We began with a stock of eight horses in existence, and a certain stock of fish as well, and a situation where the relative positions of horses and fish on different people's value scales were such as to establish conditions for the exchange of the two goods. Of the The original possessors, the most capable sellers, sold their stock of horses, while among the original non-possessors, the most capable buyers, purchased units of the stock with their fish. The final price of their sale was the equilibrium price determined ultimately by their various value scales, which also determined the quantity of exchanges that took place at that price.

0:56The net result was a shift of the stock of each good into the hands of its most capable possessors in accordance with the relative rank of the good on their value scales. The exchanges having been completed, the relatively most capable possessors own the stock and the market for this good has come to a close. With arrival at equilibrium, the exchanges have shifted the goods to the most capable The market can be renewed again only if there is a change in the relative position of the two goods under consideration on the value scales of at least two individuals, one of them a possessor of one good and the other a possessor of the second good.

2:04Exchanges will then take place in a quantity and at a final price determined by the intersection of the new combination of supply and demand schedules. This may set a different quantity of exchanges at the old equilibrium price or at a new price, The Theory of Money and Credit

3:22Moving toward a new equilibrium position before the old one has been reached. This situation is not likely to arise in the case of the market equilibria described earlier. Generally, a market tends to clear itself quickly by establishing its equilibrium price, after which a certain number of exchanges take place leading toward what has been termed and The Plain State of Rest, the condition after the various exchanges have taken place. These equilibria market prices, however, as will be seen in later chapters, in turn tend to move towards certain long-run equilibria, in accordance with the demand schedule and the effect on the size of stock produced.

4:12The final state is never reached. If this is the effect of changes in the demand and supply schedules from one period of time to another, the next problem is to explain the causes of these changes themselves. A change in the demand schedule is due purely to a change in the relative utility rankings of the two goods, the purchase good and the sale good, on the value scales of the individual buyers on the market. An increase in the demand schedule, for example, signifies a general rise in the purchase good on the value scales of the buyers. This may be due to either A. a rise in the direct use value of the good, B. poorer opportunities to exchange the sale good for some other good, as a result, say, of a higher price of cows in terms of fish, or, see, a decline in speculative weighting for the price of the good to fall further.

5:16The last case has been discussed in detail, and has been shown to be self-correcting, impelling the market more quickly towards the true equilibrium. We can therefore omit this case now, and conclude that an increase in the demand schedule is is due either to an increase in the direct use value of the good or to a higher price of other potential purchase goods in terms of the sale good that buyers offer in exchange. A decrease in demand schedules is due precisely to the converse cases, a fall in the value in direct use or greater opportunities to buy other purchase goods for this sale good. The latter would mean a greater exchange value of fish, for example, in other fields of exchange.

6:08Changes in opportunities for other types of exchange may be a result of higher or lower prices for the other purchased goods, or they may be the result of the fact that new types of goods are being offered for fish on the market. The sudden appearance of cows being offered for fish, where none had been offered before, is a widening of exchange opportunities for fish and will result in a general decline of the demand for horses in terms of fish. A change in the market supply is, of course, also the result of a change in the relative rankings of utility on the seller's value scales. This however may be broken down into the amount of physical stock and the reservation demand schedule of the sellers.

6:58If we assume that the amount of physical stock is constant in the two periods under comparison, then a shift in supply is purely the result of a change in reservation demand. A decrease in the supply caused by an increase in reservation demand for the stock may be due to either A. An increase in the direct-use value of the good for the sellers, B. Greater Better Opportunities for Making Exchanges for Other Purchase Goods, or C. A Greater Speculative Anticipation of a Higher Price in the Future Conversely, a fall in the reservation demand schedule may be due to either A. A decrease in the direct use value of the good to the sellers or B. A dwindling of exchange opportunities for other purchase goods Thus, with the total stock constant, changes in both supply and demand are due solely to changes in the demand to hold the good by either sellers or buyers, which in turn are due to shifts in the relative utility of the two goods.

8:12From the beginning of the supply-demand analysis up to this point, we have been assuming the existence of a constant physical stock. Thus, we have been assuming the existence of eight horses, and have been considering the principles on which this stock will go into the hands of different possessors. The analysis above applies to all goods, to all cases where an existing stock is being exchanged for the stock of another good. For some goods, this point is as far as analysis can be pursued. This applies to those goods of which the stock is fixed and cannot be increased through production. They are either once produced by man or given by nature, but the stock cannot be increased by human action.

9:04Such a good, for example, is a Rembrandt painting after the death of Rembrandt. Such a painting would rank high enough on individual value scales to command a high price in exchange for other goods. The stock can never be increased, however, and its exchange and pricing is solely in terms of the previously analyzed exchange of existing stock, determined by the relative rankings of these and other goods on numerous value scales. Or assume that a certain quantity of diamonds has been produced, and no more diamonds are available anywhere. Again, the problem would be solely one of exchanging the existing stock.

9:49In these cases, there is no further problem of production, of deciding how much of a stock should be produced in a certain period of time. For most goods, however, the problem of deciding how much to produce is a crucial one. Much of the remainder of this volume, in fact, is devoted to an analysis of the problem of production. We shall now proceed to cases in which the existing stock of a good changes from one period to another. A stock may increase from one period to the next because an amount of the good has been newly produced in the meantime. This amount of new production constitutes an addition to the stock.

10:34Thus, three days after the beginning of the horse market referred to above, two new horses If the demand schedule of buyers and the reservation demand schedule of sellers remain the same, the increased stock will lower the price of the good. At the old equilibrium price, individuals find that their stock is in excess of the total demand to hold, and the consequence is an underbidding to sell that lowers the price to the new equilibrium. In terms of supply and demand, an increase in stock, with demand and reservation demand schedules remaining the same, is equivalent to a uniform increase in the supply schedule by the amount of the increased stock, in this case, by two horses. The amount supplied would be the former total plus the added two. Possessors with an excess of stock at the old equilibrium The stock price must underbid each other in order to sell the increased stock.

11:44The increased stock is reflected in a uniform increase in the supply and a consequent fall in price and an increase in the quantity exchanged. Of course, there is no reason to assume that in reality an increased stock will necessarily be accompanied by an unchanged reservation demand. But in order to study the various causal factors that interact to form the actual historical result, it is necessary to isolate each one and consider what would be its effect if the others remained unchanged. Thus, if an increased stock were at the same time absorbed by an equivalent increase in the reservation demand schedule, the supply would not increase at all, and the price and Quantity exchanged would remain unchanged.

12:41On the total demand stock schedule this situation would be reflected in an increase in stock accompanied by an offsetting rise in the total demand leaving the price at the original level. A decrease in stock from one period to another may result from the using up of the stock. Thus, if we consider only consumers' goods, a part of the stock may be consumed. Since goods are generally used up in the process of consumption, if there is not sufficient production during the time considered, the total stock in existence may decline. Thus, one new horse may be produced, but two may die, from one point of time to the next, and the result may be a market with one less horse in existence.

13:34A decline in stock, with demand remaining the same, has the exactly reverse effect. At the old equilibrium price there is an excess demand to hold compared to the stock available, and the result is an upbidding of prices to the new equilibrium. The supply schedule uniformly decreases by the decrease in stock, and the result is a higher price and a smaller quantity of goods exchanged. Thus, in the case just mentioned, if the original stock is eight horses and one new horse is produced while two die, the new stock of the good is 8 plus 1 minus 2 equals 7 horses.

14:23It is important to be on one's guard here against a common confusion over such a term as an increase in demand. Whenever this phrase is used by itself in this work, it always signifies an increase in the demand schedule, that is, an increase in the amounts that will be demanded at each hypothetical price. This always tends to cause an increase in price. It must never be confused with the increase in quantity demanded that takes place, for example, in response to an increased supply. An increased supply schedule, by lowering price, induces the market to demand the larger quantity offered.

15:11This however is not an increase in the demand schedule, but an extension along the same demand schedule. It is a larger quantity demanded in response to a more attractive price offer. This simple movement along the same schedule must not be confused with an increase in the and the demand schedule at each possible price.