WEBVTT NOTE 2.08. Stock and the Total Demand to Hold 1 00:00:00.000 --> 00:00:06.000 8. Stock and the Total Demand to Hold 2 00:00:06.000 --> 00:00:16.000 There is another way of treating supply and demand schedules, which, for some problems of analysis, is more useful than the schedules presented earlier. 3 00:00:16.000 --> 00:00:26.000 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. 4 00:00:26.000 --> 00:00:35.000 Thus, at a price of 86, suppliers supply three horses on the market and withhold the other five in their stock. 5 00:00:35.000 --> 00:00:42.000 This withholding is caused by one of the factors mentioned as possible costs of the exchange. 6 00:00:42.000 --> 00:00:50.000 Either the direct use of the good, say the horse, has greater utility than the receipt of the fish in direct use. 7 00:00:50.000 --> 00:00:54.000 Or else, the horse could be exchanged for some other good. 8 00:00:54.000 --> 00:01:02.000 Or, finally, the seller expects the final price to be higher so that he can profitably delay the sale. 9 00:01:02.000 --> 00:01:08.000 The amount that sellers will withhold on the market is termed their reservation demand. 10 00:01:08.000 --> 00:01:15.000 This is not, like the demand studied previously, a demand for a good in exchange. 11 00:01:15.000 --> 00:01:18.000 This is a demand to hold stock. 12 00:01:18.000 --> 00:01:27.000 Thus, the concept of a demand to hold a stock of goods will always include both demand factors. 13 00:01:27.000 --> 00:01:33.520 It will include the demand for the good in exchange by non-possessors, plus the demand 14 00:01:33.520 --> 00:01:36.840 to hold the stock by the possessors. 15 00:01:36.840 --> 00:01:43.580 The demand for the good in exchange is also a demand to hold, since, regardless of what 16 00:01:43.580 --> 00:01:48.820 What the buyer intends to do with the good in the future, he must hold the good from 17 00:01:48.820 --> 00:01:54.380 the time it comes into his ownership and possession by means of exchange. 18 00:01:54.380 --> 00:02:00.820 We therefore arrive at the concept of a total demand to hold for a good, differing from 19 00:02:00.820 --> 00:02:08.040 the previous concept of exchange demand, although including the latter in addition to the reservation 20 00:02:08.040 --> 00:02:10.720 demand by the sellers. 21 00:02:10.720 --> 00:02:17.220 If we know the total stock of the good in existence, here eight horses, we may by inspecting 22 00:02:17.220 --> 00:02:25.080 the supply and demand schedules arrive at a total demand to hold, or total demand schedule 23 00:02:25.080 --> 00:02:26.740 for the market. 24 00:02:26.740 --> 00:02:33.800 For example, at a price of 82, nine horses are demanded by the buyers in exchange, and 25 00:02:33.800 --> 00:02:41.080 And eight minus one equals seven horses are withheld by the sellers, that is, demanded 26 00:02:41.080 --> 00:02:43.520 to be held by the sellers. 27 00:02:43.520 --> 00:02:51.320 Therefore, the total demand to hold horses on the market is nine plus seven equals sixteen 28 00:02:51.320 --> 00:02:52.640 horses. 29 00:02:52.640 --> 00:02:59.560 On the other hand, at the price of ninety-seven, no horses are withheld by sellers, whose reservation 30 00:02:59.560 --> 00:03:05.720 Reservation demand is therefore zero, while the demand by buyers is two. 31 00:03:05.720 --> 00:03:13.880 Total demand to hold at this price is zero plus two equals two horses. 32 00:03:13.880 --> 00:03:20.960 It is clear that the demand schedule increases or remains the same as the price falls, while 33 00:03:20.960 --> 00:03:28.040 the reservation demand schedule of the sellers also tends to increase as the price falls. 34 00:03:28.040 --> 00:03:32.920 The total demand schedule is the result of adding the two schedules. 35 00:03:32.920 --> 00:03:39.400 Clearly, the reservation demand of the sellers increases as the price falls for this reason. 36 00:03:39.400 --> 00:03:45.460 With a lower price, the value of the purchased good in direct use or in other and future 37 00:03:45.460 --> 00:03:52.180 exchanges relatively increases, and therefore the seller tends to withhold more of the good 38 00:03:52.180 --> 00:03:54.880 from exchange. 39 00:03:54.880 --> 00:04:01.840 Another point of interest is that at the equilibrium price, the total demand to hold is equal to 40 00:04:01.840 --> 00:04:04.160 the total stock in existence. 41 00:04:04.160 --> 00:04:11.000 Thus, the equilibrium price not only equates the supply and demand on the market, it also 42 00:04:11.000 --> 00:04:18.200 equates the stock of a good to be held with the desire of people to hold it, buyers and 43 00:04:18.200 --> 00:04:20.600 sellers included. 44 00:04:20.600 --> 00:04:26.680 It is clear that the market always tends to set the price of a good so as to equate the 45 00:04:26.680 --> 00:04:30.680 stock with the total demand to hold the stock. 46 00:04:30.680 --> 00:04:35.280 Suppose that the price of a good is higher than this equilibrium price. 47 00:04:35.280 --> 00:04:42.960 Say that the price is 92, at which the stock is 8 and the total demand to hold is 4. 48 00:04:42.960 --> 00:04:48.760 This means 4 horses exist which their possessors do not want to possess. 49 00:04:48.760 --> 00:04:56.060 It is clear that someone must possess this stock, since all goods must be property, otherwise 50 00:04:56.060 --> 00:04:59.440 they would not be objects of human action. 51 00:04:59.440 --> 00:05:06.100 Since all the stock must at all times be possessed by someone, the fact that the stock is greater 52 00:05:06.100 --> 00:05:12.400 than total demand means that there is an imbalance in the economy, that some of the possessors 53 00:05:12.400 --> 00:05:15.800 are unhappy with their possession of the stock. 54 00:05:15.800 --> 00:05:21.800 They tend to lower the price in order to sell the stock, and the price falls until finally 55 00:05:21.800 --> 00:05:25.800 the stock is equated with the demand to hold. 56 00:05:25.800 --> 00:05:33.520 Conversely, suppose that the price is below equilibrium, say at 85, where 13 horses are 57 00:05:33.520 --> 00:05:36.920 demanded compared to a stock of 8. 58 00:05:36.920 --> 00:05:43.960 The bids of the eager non-possessors for the scarce stock push up the price until it reaches 59 00:05:43.960 --> 00:05:45.960 Equilibrium 60 00:05:45.960 --> 00:05:52.460 In cases where individuals correctly anticipate the equilibrium price, the speculative element 61 00:05:52.460 --> 00:05:58.400 will tend to render the total demand even more elastic and flatter. 62 00:05:58.400 --> 00:06:04.360 At a higher than equilibrium price, few will want to keep the stock, the buyers will demand 63 00:06:04.360 --> 00:06:08.920 very little, and the sellers will be eager to dispose of the good. 64 00:06:08.920 --> 00:06:15.500 On the other hand, at a lower price, the demand to hold will be far greater than the stock. 65 00:06:15.500 --> 00:06:20.840 Buyers will demand heavily, and sellers will be reluctant to sell their stock. 66 00:06:20.840 --> 00:06:27.000 The discrepancies between total demand and stock will be far greater, and the underbidding 67 00:06:27.000 --> 00:06:32.800 and overbidding will more quickly bring about the equilibrium price. 68 00:06:32.800 --> 00:06:39.200 We have seen that at the equilibrium price, the most capable or most urgent buyers made 69 00:06:39.200 --> 00:06:42.840 the exchanges with the most capable sellers. 70 00:06:42.840 --> 00:06:48.880 Here we see that the result of the exchange process is that the stock finally goes into 71 00:06:48.880 --> 00:06:52.760 the hands of the most capable possessors. 72 00:06:52.760 --> 00:07:00.560 We remember that in the sale of the 8 horses, the most capable buyers, X1 through X5, purchased 73 00:07:00.560 --> 00:07:06.200 from the most capable sellers of the good, Z1 through Z5. 74 00:07:06.200 --> 00:07:13.360 At the conclusion of the exchange, then, the possessors are X1 through X5, and the excluded 75 00:07:13.360 --> 00:07:17.200 sellers, Z6 through Z8. 76 00:07:17.200 --> 00:07:24.160 It is these individuals who finish by possessing the eight horses, and these are the most capable 77 00:07:24.160 --> 00:07:25.160 possessors. 78 00:07:25.160 --> 00:07:31.060 The price of 89 barrels of fish per horse, these were the ones who preferred the horse 79 00:07:31.060 --> 00:07:38.260 on their value scales to 89 barrels of fish, and they acted on the basis of this preference. 80 00:07:38.260 --> 00:07:43.580 For five of the individuals, this meant exchanging their fish for a horse. 81 00:07:43.580 --> 00:07:48.680 For three, it meant refusing to part with their horses for the fish. 82 00:07:48.680 --> 00:07:54.980 The other nine individuals on the market were the less capable possessors, and they concluded 83 00:07:54.980 --> 00:08:01.460 by Possessing the Fish instead of the Horse, even if they started by possessing horses. 84 00:08:01.460 --> 00:08:08.540 These were the ones who ranked 89 barrels of fish above one horse on their value scale. 85 00:08:08.540 --> 00:08:14.140 Five of these were original possessors of horses who exchanged them for fish. 86 00:08:14.140 --> 00:08:19.600 Four simply retained the fish without purchasing a horse. 87 00:08:19.600 --> 00:08:27.360 The total demand stock analysis is a useful twin companion to the supply-demand analysis. 88 00:08:27.360 --> 00:08:31.020 Each has advantages for use in different spheres. 89 00:08:31.020 --> 00:08:37.560 One relative defect of the total demand stock analysis is that it does not reveal the differences 90 00:08:37.560 --> 00:08:40.520 between the buyers and the sellers. 91 00:08:40.520 --> 00:08:46.720 In considering total demand, it abstracts from actual exchanges, and therefore does 92 00:08:46.720 --> 00:08:57.720 It does not determine the quantity of exchanges, it reveals only the equilibrium price, without demonstrating the equilibrium quantity exchanged. 93 00:08:57.720 --> 00:09:05.720 However, it focuses more sharply on the fundamental truth that price is determined solely by utility. 94 00:09:05.720 --> 00:09:14.720 We see that the fundamental determinants of price are the value scales of all individuals, buyers and sellers in the market, 95 00:09:14.720 --> 00:09:21.320 – and that the physical stock simply assumes its place on these scales. 96 00:09:21.320 --> 00:09:27.720 It is clear in these cases of direct exchange of useful goods that even if the utility of 97 00:09:27.720 --> 00:09:34.520 goods for buyers or sellers is at present determined by its subjective exchange value 98 00:09:34.520 --> 00:09:42.000 for the individual, the sole ultimate source of utility of each good is its direct use 99 00:09:42.000 --> 00:09:43.360 value. 100 00:09:43.360 --> 00:09:49.440 If the major utility of a horse to its possessor is the fish or the cow that he can procure 101 00:09:49.440 --> 00:09:55.820 in exchange, and the major value of the latter to their possessors is the horse obtainable 102 00:09:55.820 --> 00:10:03.080 in exchange, etc., the ultimate determinant of the utility of each good is its direct 103 00:10:03.080 --> 00:10:06.480 use value to its individual consumer.