WEBVTT NOTE 2.07. Speculation and Supply and Demand Schedules 1 00:00:00.000 --> 00:00:06.140 7. Speculation and Supply and Demand Schedules 2 00:00:06.140 --> 00:00:11.920 We have seen that market price is, in the final analysis, determined by the intersection 3 00:00:11.920 --> 00:00:18.240 of the supply and demand schedules. It is now in order to consider further the determinants 4 00:00:18.240 --> 00:00:24.760 of these particular schedules. Can we establish any other conclusions concerning the causes 5 00:00:24.760 --> 00:00:37.220 We remember that at any given price the amount of a good that an individual will buy or sell 6 00:00:37.220 --> 00:00:44.020 is determined by the position of the sale good and the purchase good on his value scale. 7 00:00:44.020 --> 00:00:50.380 He will demand a good if the marginal utility of adding a unit of the purchase good is greater 8 00:00:50.380 --> 00:01:08.980 Let us further analyze the value scales of the buyers and sellers. 9 00:01:08.980 --> 00:01:15.000 We have seen that the two sources of value that a good may have are direct use value 10 00:01:15.000 --> 00:01:21.120 and Exchange Value, and that the higher value is the determinant for the actor. 11 00:01:21.120 --> 00:01:27.940 An individual, therefore, can demand a horse in exchange for one of two reasons, its direct 12 00:01:27.940 --> 00:01:34.940 use value to him, or the value that he believes it will be able to command in exchange. 13 00:01:34.940 --> 00:01:39.580 If the former, then he will be a consumer of the horse's services. 14 00:01:39.580 --> 00:01:46.140 If the latter, then he purchases in order to make a more advantageous exchange later. 15 00:01:46.140 --> 00:01:51.660 Thus suppose in the foregoing example that the existing market price has not reached 16 00:01:51.660 --> 00:01:56.940 equilibrium, that it is now at 85 barrels per horse. 17 00:01:56.940 --> 00:02:02.780 Many demanders may realize that this price is below the equilibrium, and that therefore 18 00:02:02.780 --> 00:02:32.780 The Theory of Money and Credit The Theory of Money and Credit 19 00:02:32.780 --> 00:02:34.780 The Theory of Money and Credit 20 00:03:02.780 --> 00:03:14.580 Let us suppose the highly unlikely event that all demanders and suppliers are able to forecast 21 00:03:14.580 --> 00:03:18.260 exactly the final equilibrium price. 22 00:03:18.260 --> 00:03:24.380 What would be the pattern of supply and demand on the market in such an extreme case? 23 00:03:24.380 --> 00:03:26.060 It would be as follows. 24 00:03:26.060 --> 00:03:33.080 At a price above equilibrium, say 89, no one would demand the good, and suppliers would 25 00:03:33.080 --> 00:03:35.540 supply their entire stock. 26 00:03:35.540 --> 00:03:41.520 At a price below equilibrium, no one would supply the good, and everyone would demand 27 00:03:41.520 --> 00:03:43.840 as much as he could purchase. 28 00:03:43.840 --> 00:03:49.560 Such unanimously correct forecasts are not likely to take place in human action. 29 00:03:49.560 --> 00:03:56.400 But this case points up the fact that the more this anticipatory or speculative element 30 00:03:56.400 --> 00:04:03.600 enters into supply and demand, the more quickly will the market price tend toward equilibrium. 31 00:04:03.600 --> 00:04:09.380 Obviously, the more the actors anticipate the final price, the further apart will be 32 00:04:09.380 --> 00:04:16.160 supply and demand at any price differing from equilibrium, the more drastic the shortages 33 00:04:16.160 --> 00:04:21.160 The Theory of Money and Credit 34 00:04:46.160 --> 00:04:51.160 Do you assume that the equilibrium price will be lower than it actually is? 35 00:04:51.160 --> 00:04:57.160 Does this change the equilibrium price or obstruct the passage to that price? 36 00:04:57.160 --> 00:05:04.160 Suppose that the intersection of the supply and demand schedules will be at 85 instead of 89. 37 00:05:04.160 --> 00:05:10.160 It is clear that this will be only a provisional resting point for the price. 38 00:05:10.160 --> 00:05:28.160 As soon as the price settles at 85, the demanders see that shortages develop at this price, that they would like to buy more than is available, and the overbidding of the demanders raises the price again to the genuine equilibrium price. 39 00:05:28.160 --> 00:05:49.160 The same process of revelation of error occurs in the case of errors of anticipation by suppliers and thus the forces of the market tend inexorably toward the establishment of the genuine equilibrium price, undistorted by speculative errors, which tend to reveal themselves and be eliminated. 40 00:05:49.160 --> 00:06:07.160 As soon as suppliers or demanders find that the price that their speculative errors have set is not really an equilibrium, and that shortages and or surpluses develop, their actions tend once again to establish the equilibrium position. 41 00:06:07.160 --> 00:06:17.160 The actions of both buyers and sellers on the market may be related to the concepts of psychic revenue, profit and cost. 42 00:06:17.160 --> 00:06:23.520 Remember that the aim of every actor is the highest position of psychic revenue, and thus 43 00:06:23.520 --> 00:06:30.440 the making of a psychic profit compared to his next best alternative, his cost. 44 00:06:30.440 --> 00:06:36.240 Whether or not an individual buys depends on whether it is his best alternative with 45 00:06:36.240 --> 00:06:40.440 his given resources, in this case, his fish. 46 00:06:40.440 --> 00:06:46.320 His expected revenue in any action will be balanced against his expected cost. 47 00:06:46.320 --> 00:06:53.040 his next best alternative. In this case, the revenue will be either a. the satisfaction 48 00:06:53.040 --> 00:07:00.120 of ends from the direct use of the horse, or b. expected resale of the horse at a higher 49 00:07:00.120 --> 00:07:07.640 price, whichever has the highest utility to him. His cost will be either a. the marginal 50 00:07:07.640 --> 00:07:16.080 utility of the fish given up in direct use, or b. possibly the exchange value of the fish 51 00:07:16.080 --> 00:07:23.600 Fish for some other good, or c. the expected future purchase of the horse at a lower price, 52 00:07:23.600 --> 00:07:26.240 whichever has the highest utility. 53 00:07:26.240 --> 00:07:30.340 He will buy the horse if the expected revenue is greater. 54 00:07:30.340 --> 00:07:34.440 He will fail to buy if the expected cost is greater. 55 00:07:34.440 --> 00:07:40.120 The expected revenue is the marginal utility of the added horse for the buyer. 56 00:07:40.120 --> 00:07:45.120 The expected cost is the marginal utility of the fish given up. 57 00:07:45.120 --> 00:07:52.160 For either revenue or cost, the higher value in direct use or in exchange will be chosen 58 00:07:52.160 --> 00:07:56.040 as the marginal utility of the good. 59 00:07:56.040 --> 00:07:58.540 Now let us consider the seller. 60 00:07:58.540 --> 00:08:04.240 The seller, as well as the buyer, attempts to maximize his psychic revenue by trying 61 00:08:04.240 --> 00:08:11.280 to attain a revenue higher than his psychic cost, the utility of the next best alternative 62 00:08:11.280 --> 00:08:14.900 he will have to forgo in taking his action. 63 00:08:14.900 --> 00:08:21.420 The seller will weigh the marginal utility of the added sale good, in this case, fish, 64 00:08:21.420 --> 00:08:27.660 against the marginal utility of the purchase good given up, the horse, in deciding whether 65 00:08:27.660 --> 00:08:32.180 or not to make the sale at any particular price. 66 00:08:32.180 --> 00:08:37.280 The psychic revenue for the seller will be the higher of the utilities stemming from 67 00:08:37.280 --> 00:08:45.040 from one of the following sources a the value in direct use of the sale good the fish or 68 00:08:45.040 --> 00:08:51.600 b the speculative value of re-exchanging the fish for the horse at a lower price in the 69 00:08:51.600 --> 00:08:57.760 future the psychic revenue for the seller will be the higher of the utilities stemming 70 00:08:57.760 --> 00:09:05.920 from one of the following sources a the value in direct use of the sale good the fish or 71 00:09:05.920 --> 00:09:12.560 B. The speculative value of re-exchanging the fish for the horse at a lower price in the 72 00:09:12.560 --> 00:09:13.560 future. 73 00:09:13.560 --> 00:09:19.640 The cost of the seller's action will be the highest utility foregone among the following 74 00:09:19.640 --> 00:09:20.640 alternatives. 75 00:09:20.640 --> 00:09:25.240 A. The value in direct use of the horse given up. 76 00:09:25.240 --> 00:09:31.040 Or B. The speculative value of selling at a higher price in the future. 77 00:09:31.040 --> 00:09:37.040 For C, the exchange value of acquiring some other good for the horse. 78 00:09:37.040 --> 00:09:41.040 He will sell the horse if the expected revenue is greater. 79 00:09:41.040 --> 00:09:45.360 He will fail to sell if the expected cost is greater. 80 00:09:45.360 --> 00:09:51.000 We thus see that the situations of the sellers and the buyers are comparable. 81 00:09:51.000 --> 00:09:56.420 Both act or fail to act in accordance with their estimate of the alternative that will 82 00:09:56.420 --> 00:09:59.020 yield them the highest utility. 83 00:09:59.020 --> 00:10:04.980 It is the position of the utilities on the two sets of value scales of the individual 84 00:10:04.980 --> 00:10:11.520 buyers and sellers that determines the market price and the amount that will be exchanged 85 00:10:11.520 --> 00:10:13.100 at that price. 86 00:10:13.100 --> 00:10:20.740 In other words, it is for every good, utility and utility alone that determines the price 87 00:10:20.740 --> 00:10:23.980 and the quantity exchanged. 88 00:10:23.980 --> 00:10:30.820 Utility and utility alone determines the nature of the supply and demand schedules. 89 00:10:30.820 --> 00:10:36.780 It is therefore fallacious to believe, as has been the popular assumption, that utility 90 00:10:36.780 --> 00:10:43.580 and costs are equally and independently potent in determining price. 91 00:10:43.580 --> 00:10:50.900 Cost is simply the utility of the next best alternative that must be foregone in any action, 92 00:10:50.900 --> 00:10:57.140 and it is therefore part and parcel of utility on the individual's value scale. 93 00:10:57.140 --> 00:11:04.000 This cost is, of course, always a present consideration of a future event, even if this 94 00:11:04.000 --> 00:11:06.180 future is a very near one. 95 00:11:06.180 --> 00:11:12.820 Thus, the foregone utility in making the purchase might be the direct consumption of fish that 96 00:11:12.820 --> 00:11:19.060 the actor might have engaged in within a few hours, or it might be the possibility of exchanging 97 00:11:19.060 --> 00:11:24.900 for a Cow, whose utility would be enjoyed over a long period of time. 98 00:11:24.900 --> 00:11:30.260 It goes without saying, as has been indicated in the previous chapter, that the present 99 00:11:30.260 --> 00:11:38.340 consideration of revenue and of cost in any action is based on the present value of expected 100 00:11:38.340 --> 00:11:41.280 future revenues and costs. 101 00:11:41.280 --> 00:11:48.260 The point is that both the utilities derived and the utilities foregone in any action refer 102 00:11:48.260 --> 00:11:55.060 will occur to some point in the future, even if a very near one, and that past costs play 103 00:11:55.060 --> 00:12:00.440 no role in human action, and hence in determining price. 104 00:12:00.440 --> 00:12:05.380 The importance of this fundamental truth will be made clear in later chapters.