WEBVTT NOTE 2.09. Continuing Markets and Changes in Price 1 00:00:00.000 --> 00:00:05.920 9. Continuing Markets and Changes in Price 2 00:00:05.920 --> 00:00:12.120 How then may we sum up the analysis of our hypothetical horse and fish market? We began 3 00:00:12.120 --> 00:00:17.800 with a stock of eight horses in existence, and a certain stock of fish as well, and a 4 00:00:17.800 --> 00:00:23.360 situation where the relative positions of horses and fish on different people's value 5 00:00:23.360 --> 00:00:29.600 scales were such as to establish conditions for the exchange of the two goods. Of the 6 00:00:29.600 --> 00:00:36.080 The original possessors, the most capable sellers, sold their stock of horses, while among the 7 00:00:36.080 --> 00:00:41.880 original non-possessors, the most capable buyers, purchased units of the stock with 8 00:00:41.880 --> 00:00:43.280 their fish. 9 00:00:43.280 --> 00:00:49.600 The final price of their sale was the equilibrium price determined ultimately by their various 10 00:00:49.600 --> 00:00:56.660 value scales, which also determined the quantity of exchanges that took place at that price. 11 00:00:56.660 --> 00:01:02.580 The net result was a shift of the stock of each good into the hands of its most capable 12 00:01:02.580 --> 00:01:08.720 possessors in accordance with the relative rank of the good on their value scales. 13 00:01:08.720 --> 00:01:15.260 The exchanges having been completed, the relatively most capable possessors own the stock and 14 00:01:15.260 --> 00:01:19.520 the market for this good has come to a close. 15 00:01:19.520 --> 00:01:24.780 With arrival at equilibrium, the exchanges have shifted the goods to the most capable 16 00:01:24.780 --> 00:01:54.780 The market can be renewed again only if there is a change in the relative position of the two goods under consideration 17 00:01:54.780 --> 00:02:01.220 on the value scales of at least two individuals, one of them a possessor of one good and the 18 00:02:01.220 --> 00:02:04.700 other a possessor of the second good. 19 00:02:04.700 --> 00:02:11.020 Exchanges will then take place in a quantity and at a final price determined by the intersection 20 00:02:11.020 --> 00:02:15.760 of the new combination of supply and demand schedules. 21 00:02:15.760 --> 00:02:22.900 This may set a different quantity of exchanges at the old equilibrium price or at a new price, 22 00:02:22.900 --> 00:02:24.900 The Theory of Money and Credit 23 00:03:22.900 --> 00:03:28.900 Moving toward a new equilibrium position before the old one has been reached. 24 00:03:28.900 --> 00:03:35.900 This situation is not likely to arise in the case of the market equilibria described earlier. 25 00:03:35.900 --> 00:03:42.900 Generally, a market tends to clear itself quickly by establishing its equilibrium price, 26 00:03:42.900 --> 00:03:48.900 after which a certain number of exchanges take place leading toward what has been termed 27 00:03:48.900 --> 00:03:56.020 and The Plain State of Rest, the condition after the various exchanges have taken place. 28 00:03:56.020 --> 00:04:02.520 These equilibria market prices, however, as will be seen in later chapters, in turn tend 29 00:04:02.520 --> 00:04:08.860 to move towards certain long-run equilibria, in accordance with the demand schedule and 30 00:04:08.860 --> 00:04:12.160 the effect on the size of stock produced. 31 00:04:12.160 --> 00:04:15.880 The final state is never reached. 32 00:04:15.880 --> 00:04:22.080 If this is the effect of changes in the demand and supply schedules from one period of time 33 00:04:22.080 --> 00:04:28.220 to another, the next problem is to explain the causes of these changes themselves. 34 00:04:28.220 --> 00:04:35.220 A change in the demand schedule is due purely to a change in the relative utility rankings 35 00:04:35.220 --> 00:04:41.620 of the two goods, the purchase good and the sale good, on the value scales of the individual 36 00:04:41.620 --> 00:04:43.860 buyers on the market. 37 00:04:43.860 --> 00:04:50.220 An increase in the demand schedule, for example, signifies a general rise in the purchase good 38 00:04:50.220 --> 00:04:53.100 on the value scales of the buyers. 39 00:04:53.100 --> 00:05:01.280 This may be due to either A. a rise in the direct use value of the good, B. poorer opportunities 40 00:05:01.280 --> 00:05:08.020 to exchange the sale good for some other good, as a result, say, of a higher price of cows 41 00:05:08.020 --> 00:05:15.380 in terms of fish, or, see, a decline in speculative weighting for the price of the good to fall 42 00:05:15.380 --> 00:05:16.380 further. 43 00:05:16.380 --> 00:05:21.980 The last case has been discussed in detail, and has been shown to be self-correcting, 44 00:05:21.980 --> 00:05:26.740 impelling the market more quickly towards the true equilibrium. 45 00:05:26.740 --> 00:05:32.820 We can therefore omit this case now, and conclude that an increase in the demand schedule is 46 00:05:32.820 --> 00:05:39.140 is due either to an increase in the direct use value of the good or to a higher price 47 00:05:39.140 --> 00:05:46.180 of other potential purchase goods in terms of the sale good that buyers offer in exchange. 48 00:05:46.180 --> 00:05:53.180 A decrease in demand schedules is due precisely to the converse cases, a fall in the value 49 00:05:53.180 --> 00:06:00.620 in direct use or greater opportunities to buy other purchase goods for this sale good. 50 00:06:00.620 --> 00:06:08.720 The latter would mean a greater exchange value of fish, for example, in other fields of exchange. 51 00:06:08.720 --> 00:06:14.540 Changes in opportunities for other types of exchange may be a result of higher or lower 52 00:06:14.540 --> 00:06:20.200 prices for the other purchased goods, or they may be the result of the fact that new types 53 00:06:20.200 --> 00:06:23.880 of goods are being offered for fish on the market. 54 00:06:23.880 --> 00:06:29.780 The sudden appearance of cows being offered for fish, where none had been offered before, 55 00:06:29.780 --> 00:06:35.820 is a widening of exchange opportunities for fish and will result in a general decline 56 00:06:35.820 --> 00:06:40.020 of the demand for horses in terms of fish. 57 00:06:40.020 --> 00:06:45.620 A change in the market supply is, of course, also the result of a change in the relative 58 00:06:45.620 --> 00:06:50.340 rankings of utility on the seller's value scales. 59 00:06:50.340 --> 00:06:55.820 This however may be broken down into the amount of physical stock and the reservation 60 00:06:55.820 --> 00:06:58.900 demand schedule of the sellers. 61 00:06:58.900 --> 00:07:05.780 If we assume that the amount of physical stock is constant in the two periods under comparison, 62 00:07:05.780 --> 00:07:12.100 then a shift in supply is purely the result of a change in reservation demand. 63 00:07:12.100 --> 00:07:18.600 A decrease in the supply caused by an increase in reservation demand for the stock may be 64 00:07:18.600 --> 00:07:26.180 due to either A. An increase in the direct-use value of the good for the sellers, B. Greater 65 00:07:26.180 --> 00:07:31.180 Better Opportunities for Making Exchanges for Other Purchase Goods, or 66 00:07:31.180 --> 00:07:37.180 C. A Greater Speculative Anticipation of a Higher Price in the Future 67 00:07:37.180 --> 00:07:42.180 Conversely, a fall in the reservation demand schedule may be due to either 68 00:07:42.180 --> 00:07:47.180 A. A decrease in the direct use value of the good to the sellers 69 00:07:47.180 --> 00:07:53.180 or B. A dwindling of exchange opportunities for other purchase goods 70 00:07:53.180 --> 00:08:12.180 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. 71 00:08:12.180 --> 00:08:21.180 From the beginning of the supply-demand analysis up to this point, we have been assuming the existence of a constant physical stock. 72 00:08:21.180 --> 00:08:26.460 Thus, we have been assuming the existence of eight horses, and have been considering 73 00:08:26.460 --> 00:08:32.180 the principles on which this stock will go into the hands of different possessors. 74 00:08:32.180 --> 00:08:39.880 The analysis above applies to all goods, to all cases where an existing stock is being 75 00:08:39.880 --> 00:08:43.380 exchanged for the stock of another good. 76 00:08:43.380 --> 00:08:47.980 For some goods, this point is as far as analysis can be pursued. 77 00:08:47.980 --> 00:08:54.900 This applies to those goods of which the stock is fixed and cannot be increased through production. 78 00:08:54.900 --> 00:09:01.980 They are either once produced by man or given by nature, but the stock cannot be increased 79 00:09:01.980 --> 00:09:04.020 by human action. 80 00:09:04.020 --> 00:09:09.260 Such a good, for example, is a Rembrandt painting after the death of Rembrandt. 81 00:09:09.260 --> 00:09:14.180 Such a painting would rank high enough on individual value scales to command a high 82 00:09:14.180 --> 00:09:17.260 price in exchange for other goods. 83 00:09:17.260 --> 00:09:23.780 The stock can never be increased, however, and its exchange and pricing is solely in 84 00:09:23.780 --> 00:09:30.220 terms of the previously analyzed exchange of existing stock, determined by the relative 85 00:09:30.220 --> 00:09:35.660 rankings of these and other goods on numerous value scales. 86 00:09:35.660 --> 00:09:41.460 Or assume that a certain quantity of diamonds has been produced, and no more diamonds are 87 00:09:41.460 --> 00:09:43.140 available anywhere. 88 00:09:43.140 --> 00:09:49.260 Again, the problem would be solely one of exchanging the existing stock. 89 00:09:49.260 --> 00:09:55.780 In these cases, there is no further problem of production, of deciding how much of a stock 90 00:09:55.780 --> 00:09:59.540 should be produced in a certain period of time. 91 00:09:59.540 --> 00:10:05.740 For most goods, however, the problem of deciding how much to produce is a crucial one. 92 00:10:05.740 --> 00:10:11.040 Much of the remainder of this volume, in fact, is devoted to an analysis of the problem of 93 00:10:11.040 --> 00:10:12.800 production. 94 00:10:12.800 --> 00:10:18.860 We shall now proceed to cases in which the existing stock of a good changes from one 95 00:10:18.860 --> 00:10:20.780 period to another. 96 00:10:20.780 --> 00:10:26.820 A stock may increase from one period to the next because an amount of the good has been 97 00:10:26.820 --> 00:10:29.700 newly produced in the meantime. 98 00:10:29.700 --> 00:10:34.580 This amount of new production constitutes an addition to the stock. 99 00:10:34.580 --> 00:10:40.940 Thus, three days after the beginning of the horse market referred to above, two new horses 100 00:10:40.940 --> 00:10:51.760 If the demand schedule of buyers and the reservation demand schedule of sellers remain the same, 101 00:10:51.760 --> 00:10:55.440 the increased stock will lower the price of the good. 102 00:10:55.440 --> 00:11:00.820 At the old equilibrium price, individuals find that their stock is in excess of the 103 00:11:00.820 --> 00:11:07.180 total demand to hold, and the consequence is an underbidding to sell that lowers the 104 00:11:07.180 --> 00:11:10.620 price to the new equilibrium. 105 00:11:10.620 --> 00:11:17.120 In terms of supply and demand, an increase in stock, with demand and reservation demand 106 00:11:17.120 --> 00:11:24.040 schedules remaining the same, is equivalent to a uniform increase in the supply schedule 107 00:11:24.040 --> 00:11:31.200 by the amount of the increased stock, in this case, by two horses. The amount supplied would 108 00:11:31.200 --> 00:11:39.120 be the former total plus the added two. Possessors with an excess of stock at the old equilibrium 109 00:11:39.120 --> 00:11:44.960 The stock price must underbid each other in order to sell the increased stock. 110 00:11:44.960 --> 00:11:51.720 The increased stock is reflected in a uniform increase in the supply and a consequent fall 111 00:11:51.720 --> 00:11:57.360 in price and an increase in the quantity exchanged. 112 00:11:57.360 --> 00:12:04.240 Of course, there is no reason to assume that in reality an increased stock will necessarily 113 00:12:04.240 --> 00:12:08.840 be accompanied by an unchanged reservation demand. 114 00:12:08.840 --> 00:12:15.040 But in order to study the various causal factors that interact to form the actual historical 115 00:12:15.040 --> 00:12:22.240 result, it is necessary to isolate each one and consider what would be its effect if the 116 00:12:22.240 --> 00:12:24.360 others remained unchanged. 117 00:12:24.360 --> 00:12:31.320 Thus, if an increased stock were at the same time absorbed by an equivalent increase in 118 00:12:31.320 --> 00:12:37.440 the reservation demand schedule, the supply would not increase at all, and the price and 119 00:12:37.440 --> 00:12:41.320 Quantity exchanged would remain unchanged. 120 00:12:41.320 --> 00:12:47.880 On the total demand stock schedule this situation would be reflected in an increase in stock 121 00:12:47.880 --> 00:12:55.760 accompanied by an offsetting rise in the total demand leaving the price at the original level. 122 00:12:55.760 --> 00:13:03.200 A decrease in stock from one period to another may result from the using up of the stock. 123 00:13:03.200 --> 00:13:09.640 Thus, if we consider only consumers' goods, a part of the stock may be consumed. 124 00:13:09.640 --> 00:13:15.840 Since goods are generally used up in the process of consumption, if there is not sufficient 125 00:13:15.840 --> 00:13:21.680 production during the time considered, the total stock in existence may decline. 126 00:13:21.680 --> 00:13:29.680 Thus, one new horse may be produced, but two may die, from one point of time to the next, 127 00:13:29.680 --> 00:13:34.660 and the result may be a market with one less horse in existence. 128 00:13:34.660 --> 00:13:42.080 A decline in stock, with demand remaining the same, has the exactly reverse effect. 129 00:13:42.080 --> 00:13:49.560 At the old equilibrium price there is an excess demand to hold compared to the stock available, 130 00:13:49.560 --> 00:13:54.240 and the result is an upbidding of prices to the new equilibrium. 131 00:13:54.240 --> 00:14:00.760 The supply schedule uniformly decreases by the decrease in stock, and the result is a 132 00:14:00.760 --> 00:14:05.600 higher price and a smaller quantity of goods exchanged. 133 00:14:05.600 --> 00:14:13.080 Thus, in the case just mentioned, if the original stock is eight horses and one new horse is 134 00:14:13.080 --> 00:14:23.720 produced while two die, the new stock of the good is 8 plus 1 minus 2 equals 7 horses. 135 00:14:23.720 --> 00:14:29.200 It is important to be on one's guard here against a common confusion over such a term 136 00:14:29.200 --> 00:14:32.480 as an increase in demand. 137 00:14:32.480 --> 00:14:38.880 Whenever this phrase is used by itself in this work, it always signifies an increase 138 00:14:38.880 --> 00:14:45.420 in the demand schedule, that is, an increase in the amounts that will be demanded at each 139 00:14:45.420 --> 00:14:47.720 hypothetical price. 140 00:14:47.720 --> 00:14:51.800 This always tends to cause an increase in price. 141 00:14:51.800 --> 00:14:58.080 It must never be confused with the increase in quantity demanded that takes place, for 142 00:14:58.080 --> 00:15:02.440 example, in response to an increased supply. 143 00:15:02.440 --> 00:15:09.000 An increased supply schedule, by lowering price, induces the market to demand the larger 144 00:15:09.000 --> 00:15:11.100 quantity offered. 145 00:15:11.100 --> 00:15:18.040 This however is not an increase in the demand schedule, but an extension along the same 146 00:15:18.040 --> 00:15:19.880 demand schedule. 147 00:15:19.880 --> 00:15:26.280 It is a larger quantity demanded in response to a more attractive price offer. 148 00:15:26.280 --> 00:15:32.240 This simple movement along the same schedule must not be confused with an increase in the 149 00:15:32.240 --> 00:15:36.240 and the demand schedule at each possible price.