4.03. Determination of Supply and Demand Schedules

0:003. Determination of Supply and Demand Schedules Every money price of a good on the market, therefore, is determined by the supply and demand schedules of the individual buyers and sellers, and their action tends to establish a uniform equilibrium price on the market, which changes only when the schedules do. Of course this equilibrium price might be a zone rather than a single price in those cases where there is a zone between the valuations of the marginal buyer and those of the marginal seller. In such rare cases where there generally must be very few buyers and very few sellers, there is a zone within which the market is cleared at any point and there is room for bargaining skill to maneuver.

0:54In the extensive markets of the money economy, however, even one buyer and one seller are likely to have one determinate price, or a very narrow zone between their maximum buying and minimum selling prices. Now the question arises, what are the determinants of the demand and supply schedules themselves? Can Any Conclusions Be Formed About the Value Scales and the Resulting Schedules? In the first place, the analysis of speculation in Chapter 2 can be applied directly to the case of the money price. There is no need to repeat that analysis here. Suffice it to say, in summary, that insofar as the equilibrium price is anticipated correctly Supply by speculators, the demand and supply schedules will reflect the fact.

1:50Above the equilibrium price, demanders will buy less than they otherwise would because of their anticipation of a later drop in the money price. Below that price, they will buy more because of an anticipation of a rise in the money price. Similarly, sellers will sell more at a price that they anticipate will soon be lowered. They will sell less at a price that they anticipate will soon be raised. The more people engage in such correct speculation, the more rapidly will the equilibrium price be reached. We also saw that preponderant errors in speculation tend inexorably to be self-correcting. If the speculative demand and supply schedules preponderantly do not estimate the correct EQUALIBRIUM PRICE, THEN IT SOON BECOMES EVIDENT THAT THAT PRICE DOES NOT REALLY CLEAR THE MARKET.

2:47UNLESS THE EQUALIBRIUM POINT SET BY THE SPECULATIVE SCHEDUALS IS IDENTICAL TO THE POINT SET BY THE SCHEDUALS MINUS THE SPECULATIVE ELEMENTS, THE MARKET AGAIN TENS TO BRING THE PRICE AND QUANTITY SOLD TO THE TRUE EQUALIBRIUM POINT. For if the speculative schedule set the price of eggs at 2 grains, and the schedules without speculation would set it at 3 grains, there is an excess of quantity demanded over quantity supplied at 2 grains, and the bidding of buyers finally brings the price to 3 grains. This and the analysis of Chapter 2 refute the charge made by some writers that speculation Man is self-justifying, that it distorts the effects of the underlying supply and demand factors by tending to establish pseudo-equilibrium prices on the market.

3:44The truth is the reverse. Speculative errors in estimating underlying factors are self-correcting, and anticipation tends to establish the true equilibrium market price more rapidly. Setting speculation aside then, let us return to the buyer's demand schedules. Suppose that he ranks the unit of a good above a certain number of ounces of gold on his value scale. What can be the possible sources of his demand for the good? In other words, what can be the sources of the utility of the good to him? There are only three sources of utility that any purchased good can have for any person.

4:31One of these is, a, the anticipated later sale of the same good for a higher money price. This is the speculative demand, basically ephemeral, a useful path to uncovering the more fundamental demand factors. This demand has just been analyzed. The second source of demand is B, direct use as a consumer's good. The third source is C, direct use as a producer's good. Source B can apply only to consumer's goods. C to producer's goods. The former are directly consumed. The latter are used in the production process and, along with other cooperating factors, are transformed into lower-order capital goods, which are then sold for money.

5:23Thus, the third source applies solely to the investing producers in their purchases of producers' goods. The second source stems from consumers. If we set aside the temporary speculative source, B is the source of the individual demand schedules for all consumers' goods, C the source of demands for all producers' What of the seller of the consumer's good or producer's good? Why is he demanding money in exchange? The seller demands money because of the marginal utility of money to him, and for this reason he ranks the money acquired above possession of the goods that he sells.

6:09The components and determinants of the utility of money will be analyzed in a later section. Thus, the buyer of a good demands it because of its direct use value either in consumption or in production. The seller demands money because of its marginal utility in exchange. This, however, does not exhaust the description of the components of market supply and demand, for we have still not explained the rankings of the good on the seller's value scale and the rankings of money on the buyer's. When a seller keeps his stock instead of selling it, what is the source of his reservation demand for the good? We have seen that the quantity of a good reserved at any point is the quantity of stock that the seller refuses to sell at the given price.

7:02The sources of a reservation demand by the seller are two. A. Anticipation of later sale at a higher price. This is the speculative factor analyzed previously. And B. Direct use of the good by the seller. This second factor is not often applicable to producer's goods, since the seller produced the producer's good for sale, and is usually not immediately prepared to use it directly in further production. Production. In some cases, however, this alternative of direct use for further production does exist. For example, a producer of crude oil may sell it, or, if the money price falls below a certain minimum, may use it in his own plant to produce gasoline.

7:52In the case of consumers' goods, which we are treating here, direct use may also be feasible, Particularly in the case of a sale of an old consumer's good previously used directly by the seller, such as an old house, painting, etc. However, with the great development of specialization in the money economy, these cases become infrequent. If we set aside A as being a temporary factor and realize that B is frequently not present in the case of either consumer's or producer's goods,

8:57In the latter case, the problem is to determine how much to invest at present in the production of a good to be produced and sold at a point in the future rather than already given stock and with the reservation demand for this stock. In the case of production, we are dealing with investment decisions concerning how much Another condition that might obtain on the market is a previous buyer's re-entering the market and re-selling a good.

9:45For him to be able to do so, it is obvious that the good must be durable. A violin playing service, for example, is so non-durable that it is not resaleable by the purchasing listeners. The total stock of the good in existence will then equal the producer's new supply plus the producer's reserved demand plus the supply offered by old possessors plus the reserved demand of the old possessors, that is, the amount the old buyers retain. If the good is Chippendale shares, which cannot be further produced, then the market supply is identical with the supply of the old possessors. There is no new production and there are no additions to stock.

10:36It is clear that the greater the proportion of old stock to new production, other things being equal, the greater will tend to be the importance of the supply of old possessors compared to that of new producers. The tendency will be for old stock to be more important the greater the durability of the good. There is one type of consumer's good, the supply of which will have to be treated in a later section on labor and earnings. This is personal service, such as the services of a doctor, a lawyer, a concert violinist, a servant, etc. These services, as we have indicated previously, are, of course, non-durable.

11:21In fact, they are consumed by the seller immediately upon their production. Not being material objects like commodities, they are the direct emanation of the effort of the supplier himself, who produces them instantaneously upon his decision. The supply depends on the decision of whether or not to produce, supply, personal effort, not on the sale of already produced stock. There is no stock in this sphere, since the goods disappear into consumption immediately on being produced. It is evident that the concept of stock is applicable only to tangible objects. The price of personal services, however, is determined by the intersection of supply and demand forces, as in the case of tangible goods.

12:16For all goods, the establishment of the equilibrium price tends to establish a state of rest, a cessation of exchanges. After the price is established, sales will take place until the stock is in the hands of the most capable possessors, in accordance with the value scales. When new production is continuing, the market will tend to be continuing, however, because of the inflow of new stock from producers coming into the market. This inflow alters the state of rest and sets the stage for new exchanges, with producers eager to sell their stock and consumers to buy. When total stock is fixed and there is no new production on the other hand, the state of Rest is likely to become important.

13:08Any changes in price or new exchanges will occur as a result of changes of valuations, that is, a change in the relative position of money and the good on the value scales of at least two individuals on the market, which will lead them to make further exchanges of the good against money. Of course, where valuations are changing, as they almost always are in a changing world, markets for old stock will again be continuing. An example of that rare type of good for which the market may be intermittent instead of continuous is Chippendale Chairs, where the stock is very limited and the money price relatively high.

13:54The stock is always distributed into the hands of the most eager possessors, and the trading may be infrequent. Whenever one of the collectors comes to value his Chippendale below a certain sum of money, and another collector values that sum in his possession below the acquisition of the furniture, an exchange is likely to occur. Most goods, however, even non-reproducible ones, have a lively continuing market because Because of continual changes in valuations and a large number of participants in the market. In sum, buyers decide to buy consumers goods at various ranges of price, setting aside previously analyzed speculative factors, because of their demand for the good for direct use.

14:46They decide to abstain from buying because of their reservation demand for money, which which they prefer to retain rather than spend on that particular good. Sellers supply the goods in all cases because of their demand for money, and those cases where they reserve a stock for themselves are due, aside from speculation on price increases, to their demand for the good for direct use. Thus, the general factors that determine the supply and demand schedules of any and all are the balancing on their value scales of their demand for the good for direct use and their demand for money, either for reservation or for exchange.

15:36Although we shall further discuss investment production decisions in a later section, it is evident that decisions to invest are due to the demand for an expected money return in the future. A decision not to invest, as we have seen, is due to a competing demand to use a stock of money in the present.