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Ministry of Education of the Russian Federation

«Saint Petersburg State University of Engineering and Economics»

Faculty of regional economy and management

Report on the course: Foreign language

Topic: Alfred Marshall. Principles of Economics

Written by: III year student Volovshikova Anastasia

Group № 791 specialization 080502/2

Approved by: docent Leonov A.G.

St.-Petersburg

2012

English summary

BOOK V GENERAL RELATIONS OF DEMAND, SUPPLY AND VALUE.

CHAPTER I. INTRODUCTORY. ON MARKETS.

A BUSINESS firm grows and attains great strength, and afterwards perhaps stagnates and decays; and at the turning point there is a balancing or equilibrium of the forces of life and decay: the latter part of Book IV. has been chiefly occupied with such balancing of forces in the life and decay of a people, or of a method of industry or trading. And as we reach to the higher stages of our work, we shall need ever more and more to think of economic forces as resembling those which make a young man grow in strength, till he reaches his prime; after which he gradually becomes stiff and inactive, till at last he sinks to make room for other and more vigorous life. But to prepare the way for this advanced study we want first to look at a simpler balancing of forces which corresponds rather to the mechanical equilibrium of a stone hanging by an elastic string, or of a number of balls resting against one another in a basin.

When demand and supply are spoken of in relation to one another, it is of course necessary that the markets to which they refer should be the same. As Cournot says, "Economists understand by the term Market, not any particular market place in which things are bought and sold, but the whole of any region in which buyers and sellers are in such free intercourse with one another that the prices of the same goods tend to equality easily and quickly." Or again as Jevons says:—"Originally a market was a public place in a town where provisions and other objects were exposed for sale; but the word has been generalized, so as to mean any body of persons who are in intimate business relations and carry on extensive transactions in any commodity.

In applying economic reasonings in practice it is often difficult to ascertain how far the movements of supply and demand in any one place are influenced by those in another. It is clear that the general tendency of the telegraph, the printing-press and steam traffic is to extend the area over which such influences act and to increase their force. The whole Western World may, in a sense, be regarded as one market for many kinds of stock exchange securities, for the more valuable metals, and to a less extent for wool and cotton and even wheat; proper allowance being made for expenses of transport, in which may be included taxes levied by any customs houses through which the goods have to pass. For in all these cases the expenses of transport, including customs duties, are not sufficient to prevent buyers from all parts of the Western World from competing with one another for the same supplies.

There are many special causes which may widen or narrow the market of any particular commodity: but nearly all those things for which there is a very wide market are in universal demand, and capable of being easily and exactly described. Thus for instance cotton, wheat, and iron satisfy wants that are urgent and nearly universal. They can be easily described, so that they can be bought and sold by persons at a distance from one another and at a distance also from the commodities. If necessary, samples can be taken of them which are truly representative: and they can even be "graded," as is the actual practice with regard to grain in America, by an independent authority; so that the purchaser may be secure that what he buys will come up to a given standard, though he has never seen a sample of the goods which he is buying and perhaps would not be able himself to form an opinion on it if he did.

Let us then consider more closely the markets for things which satisfy in an exceptional way these conditions of being in general demand, cognizable and portable. They are, as we have said, stock exchange securities and the more valuable metals.

On the stock exchange also a dealer can generally make sure of selling at nearly the same price as that at which he buys; and he is often willing to buy first class stocks at a half, or a quarter, or an eighth, or in some cases even a sixteenth per cent. less than he offers in the same breath to sell them at. If there are two securities equally good, but one of them belongs to a large issue of bonds, and the other to a small issue by the same government, so that the first is constantly coming on the market, and the latter but seldom, then the dealers will on this account alone require a larger margin between their selling price and their buying price in the latter case than in the former. This illustrates well the great law, that the larger the market for a commodity the smaller generally are the fluctuations in its price, and the lower is the percentage on the turnover which dealers charge for doing business in it.

At the opposite extremity to international stock exchange securities and the more valuable metals are, firstly, things which must be made to order to suit particular individuals, such as well-fitting clothes; and, secondly, perishable and bulky goods, such as fresh vegetables, which can seldom be profitably carried long distances. The first can scarcely be said to have a wholesale market at all; the conditions by which their price is determined are those of retail buying and selling, and the study of them may be postponed.

There are indeed wholesale markets for the second class, but they are confined within narrow boundaries; we may find our typical instance in the sale of the commoner kinds of vegetables in a country town. The market-gardeners in the neighbourhood have probably to arrange for the sale of their vegetables to the townspeople with but little external interference on either side. There may be some check to extreme prices by the power on the one side of selling, and on the other of buying elsewhere; but under ordinary circumstances the check is inoperative, and it may happen that the dealers in such a case are able to combine, and thus fix an artificial monopoly price; that is, a price determined with little direct reference to cost of production, but chiefly by a consideration of what the market will bear.

On the other hand, it may happen that some of the market-gardeners are almost equally near a second country town, and send their vegetables now to one and now to the other; and some people who occasionally buy in the first town may have equally good access to the second. The least variation in price will lead them to prefer the better market; and thus make the bargainings in the two towns to some extent mutually dependent. It may happen that this second town is in close communication with London or some other central market, so that its prices are controlled by the prices in the central market; and in that case prices in our first town also must move to a considerable extent in harmony with them. As news passes from mouth to mouth till a rumour spreads far away from its forgotten sources, so even the most secluded market is liable to be influenced by changes of which those in the market have no direct cognizance, changes that have had their origin far away and have spread gradually from market to market.

Thus at the one extreme are world markets in which competition acts directly from all parts of the globe; and at the other those secluded markets in which all direct competition from afar is shut out, though indirect and transmitted competition may make itself felt even in these; and about midway between these extremes lie the great majority of the markets which the economist and the business man have to study. Again, markets vary with regard to the period of time which is allowed to the forces of demand and supply to bring themselves into equilibrium with one another, as well as with regard to the area over which they extend. And this element of Time requires more careful attention just now than does that of Space. For the nature of the equilibrium itself, and that of the causes by which it is determined, depend on the length of the period over which the market is taken to extend. We shall find that if the period is short, the supply is limited to the stores which happen to be at hand: if the period is longer, the supply will be influenced, more or less, by the cost of producing the commodity in question; and if the period is very long, this cost will in its turn be influenced, more or less, by the cost of producing the labour and the material things required for producing the commodity. These three classes of course merge into one another by imperceptible degrees. We will begin with the first class; and consider in the next chapter those temporary equilibria of demand and supply, in which "supply" means in effect merely the stock available at the time for sale in the market; so that it cannot be directly influenced by the cost of production.

Chapter II temporary equilibrium of demand and supply

The simplest case of balance or equilibrium between desire and effort is found when a person satisfies one of his wants by his own direct work. When a boy picks blackberries for his own eating, the action of picking is probably itself pleasurable for a while; and for some time longer the pleasure of eating is more than enough to repay the trouble of picking. But after he has eaten a good deal, the desire for more diminishes; while the task of picking begins to cause weariness, which may indeed be a feeling of monotony rather than of fatigue. Equilibrium is reached when at last his eagerness to play and his disinclination for the work of picking counterbalance the desire for eating. The satisfaction which he can get from picking fruit has arrived at its maximum: for up to that time every fresh picking has added more to his pleasure than it has taken away; and after that time any further picking would take away from his pleasure more than it would add.

In a casual bargain that one person makes with another, as for instance when two backwoodsmen barter a rifle for a canoe, there is seldom anything that can properly be called an equilibrium of supply and demand: there is probably a margin of satisfaction on either side; for probably the one would be willing to give something besides the rifle for the canoe, if he could not get the canoe otherwise; while the other would in case of necessity give something besides the canoe for the rifle.

It is indeed possible that a true equilibrium may be arrived at under a system of barter; but barter, though earlier in history than buying and selling, is in some ways more intricate; and the simplest cases of a true equilibrium value are found in the markets of a more advanced state of civilization. We may put aside as of little practical importance a class of dealings which has been much discussed. They relate to pictures by old masters, rare coins and other things, which cannot be "graded" at all. The price at which each is sold, will depend much on whether any rich persons with a fancy for it happen to be present at its sale. If not, it will probably be bought by dealers who reckon on being able to sell it at a profit; and the variations in the price for which the same picture sells at successive auctions, great as they are, would be greater still if it were not for the steadying influence of professional purchasers.

Let us then turn to the ordinary dealings of modern life; and take an illustration from a corn-market in a country town, and let us assume for the sake of simplicity that all the corn in the market is of the same quality. The amount which each farmer or other seller offers for sale at any price is governed by his own need for money in hand, and by his calculation of the present and future conditions of the market with which he is connected. There are some prices which no seller would accept, some which no one would refuse. There are other intermediate prices which would be accepted for larger or smaller amounts by many or all of the sellers. Everyone will try to guess the state of the market and to govern his actions accordingly. Let us suppose that in fact there are not more than 600 quarters, the holders of which are willing to accept as low a price as 35s.; but that holders of another hundred would be tempted by 36s.; and holders of yet another three hundred by 37s. Let us suppose also that a price of 37s. would tempt buyers for only 600 quarters; while another hundred could be sold at 36s., and yet another two hundred at 35s.

Of course some of those who are really willing to take 36s. rather than leave the market without selling, will not show at once that they are ready to accept that price. And in like manner buyers will fence, and pretend to be less eager than they really are. So the price may be tossed hither and thither like a shuttlecock, as one side or the other gets the better in the "higgling and bargaining" of the market. But unless they are unequally matched; unless, for instance, one side is very simple or unfortunate in failing to gauge the strength of the other side, the price is likely to be never very far from 36s.; and it is nearly sure to be pretty close to 36s. at the end of the market. For if a holder thinks that the buyers will really be able to get at 36s. all that they care to take at that price, he will be unwilling to let slip past him any offer that is well above that price.

Buyers on their part will make similar calculations; and if at any time the price should rise considerably above 36s. they will argue that the supply will be much greater than the demand at that price: therefore even those of them who would rather pay that price than go unserved, wait; and by waiting they help to bring the price down. On the other hand, when the price is much below 36s., even those sellers who would rather take the price than leave the market with their corn unsold, will argue that at that price the demand will be in excess of the supply: so they will wait, and by waiting help to bring the price up. The price of 36s. has thus some claim to be called the true equilibrium price: because if it were fixed on at the beginning, and adhered to throughout, it would exactly equate demand and supply (i.e. the amount which buyers were willing to purchase at that price would be just equal to that for which sellers were willing to take that price); and because every dealer who has a perfect knowledge of the circumstances of the market expects that price to be established. If he sees the price differing much from 36s. he expects that a change will come before long, and by anticipating it he helps it to come quickly.

The theory of buying and selling becomes therefore much more complex when we take account of the dependence of marginal utility on amount in the case of money as well as of the commodity itself. The practical importance of this consideration is not very great. In barter a person's stock of either commodity exchanged needs to be adjusted closely to his individual wants. If his stock is too large he may have no good use for it. If his stock is too small he may have some difficulty in finding any one who can conveniently give him what he wants and is also in need of the particular things of which he himself has a superfluity. But any one who has a stock of general purchasing power, can obtain any thing he wants as soon as he meets with any one who has a superfluity of that thing: he needs not to hunt about till he comes across "the double coincidence" of a person who can spare what he wants, and also wants what he can spare. Consequently every one, and especially a professional dealer, can afford to keep command over a large stock of money; and can therefore make considerable purchases without depleting his stock of money or greatly altering its marginal value.

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