WEBVTT NOTE 4.03. Determination of Supply and Demand Schedules 1 00:00:00.000 --> 00:00:05.840 3. Determination of Supply and Demand Schedules 2 00:00:05.840 --> 00:00:11.760 Every money price of a good on the market, therefore, is determined by the supply and 3 00:00:11.760 --> 00:00:18.320 demand schedules of the individual buyers and sellers, and their action tends to establish 4 00:00:18.320 --> 00:00:25.420 a uniform equilibrium price on the market, which changes only when the schedules do. 5 00:00:25.420 --> 00:00:31.340 Of course this equilibrium price might be a zone rather than a single price in those 6 00:00:31.340 --> 00:00:38.460 cases where there is a zone between the valuations of the marginal buyer and those of the marginal 7 00:00:38.460 --> 00:00:39.460 seller. 8 00:00:39.460 --> 00:00:45.900 In such rare cases where there generally must be very few buyers and very few sellers, there 9 00:00:45.900 --> 00:00:52.100 is a zone within which the market is cleared at any point and there is room for bargaining 10 00:00:52.100 --> 00:00:54.220 skill to maneuver. 11 00:00:54.220 --> 00:01:00.420 In the extensive markets of the money economy, however, even one buyer and one seller are 12 00:01:00.420 --> 00:01:07.740 likely to have one determinate price, or a very narrow zone between their maximum buying 13 00:01:07.740 --> 00:01:10.920 and minimum selling prices. 14 00:01:10.920 --> 00:01:18.280 Now the question arises, what are the determinants of the demand and supply schedules themselves? 15 00:01:18.280 --> 00:01:24.680 Can Any Conclusions Be Formed About the Value Scales and the Resulting Schedules? 16 00:01:24.680 --> 00:01:31.080 In the first place, the analysis of speculation in Chapter 2 can be applied directly to the 17 00:01:31.080 --> 00:01:33.300 case of the money price. 18 00:01:33.300 --> 00:01:36.680 There is no need to repeat that analysis here. 19 00:01:36.680 --> 00:01:43.800 Suffice it to say, in summary, that insofar as the equilibrium price is anticipated correctly 20 00:01:43.800 --> 00:01:50.060 Supply by speculators, the demand and supply schedules will reflect the fact. 21 00:01:50.060 --> 00:01:55.820 Above the equilibrium price, demanders will buy less than they otherwise would because 22 00:01:55.820 --> 00:02:00.120 of their anticipation of a later drop in the money price. 23 00:02:00.120 --> 00:02:05.720 Below that price, they will buy more because of an anticipation of a rise in the money 24 00:02:05.720 --> 00:02:06.720 price. 25 00:02:06.720 --> 00:02:12.820 Similarly, sellers will sell more at a price that they anticipate will soon be lowered. 26 00:02:12.820 --> 00:02:17.660 They will sell less at a price that they anticipate will soon be raised. 27 00:02:17.660 --> 00:02:24.520 The more people engage in such correct speculation, the more rapidly will the equilibrium price 28 00:02:24.520 --> 00:02:26.620 be reached. 29 00:02:26.620 --> 00:02:34.100 We also saw that preponderant errors in speculation tend inexorably to be self-correcting. 30 00:02:34.100 --> 00:02:40.380 If the speculative demand and supply schedules preponderantly do not estimate the correct 31 00:02:40.380 --> 00:02:46.660 EQUALIBRIUM PRICE, THEN IT SOON BECOMES EVIDENT THAT THAT PRICE DOES NOT REALLY CLEAR THE 32 00:02:46.660 --> 00:02:47.660 MARKET. 33 00:02:47.660 --> 00:02:53.800 UNLESS THE EQUALIBRIUM POINT SET BY THE SPECULATIVE SCHEDUALS IS IDENTICAL TO THE POINT SET BY 34 00:02:53.800 --> 00:03:00.620 THE SCHEDUALS MINUS THE SPECULATIVE ELEMENTS, THE MARKET AGAIN TENS TO BRING THE PRICE AND 35 00:03:00.620 --> 00:03:05.020 QUANTITY SOLD TO THE TRUE EQUALIBRIUM POINT. 36 00:03:05.020 --> 00:03:11.120 For if the speculative schedule set the price of eggs at 2 grains, and the schedules without 37 00:03:11.120 --> 00:03:17.900 speculation would set it at 3 grains, there is an excess of quantity demanded over quantity 38 00:03:17.900 --> 00:03:25.960 supplied at 2 grains, and the bidding of buyers finally brings the price to 3 grains. 39 00:03:25.960 --> 00:03:32.440 This and the analysis of Chapter 2 refute the charge made by some writers that speculation 40 00:03:32.440 --> 00:03:38.800 Man is self-justifying, that it distorts the effects of the underlying supply and demand 41 00:03:38.800 --> 00:03:44.880 factors by tending to establish pseudo-equilibrium prices on the market. 42 00:03:44.880 --> 00:03:47.880 The truth is the reverse. 43 00:03:47.880 --> 00:03:53.920 Speculative errors in estimating underlying factors are self-correcting, and anticipation 44 00:03:53.920 --> 00:04:00.760 tends to establish the true equilibrium market price more rapidly. 45 00:04:00.760 --> 00:04:06.560 Setting speculation aside then, let us return to the buyer's demand schedules. 46 00:04:06.560 --> 00:04:12.160 Suppose that he ranks the unit of a good above a certain number of ounces of gold on his 47 00:04:12.160 --> 00:04:13.960 value scale. 48 00:04:13.960 --> 00:04:19.120 What can be the possible sources of his demand for the good? 49 00:04:19.120 --> 00:04:25.020 In other words, what can be the sources of the utility of the good to him? 50 00:04:25.020 --> 00:04:31.580 There are only three sources of utility that any purchased good can have for any person. 51 00:04:31.580 --> 00:04:38.980 One of these is, a, the anticipated later sale of the same good for a higher money price. 52 00:04:38.980 --> 00:04:45.460 This is the speculative demand, basically ephemeral, a useful path to uncovering the 53 00:04:45.460 --> 00:04:48.220 more fundamental demand factors. 54 00:04:48.220 --> 00:04:51.100 This demand has just been analyzed. 55 00:04:51.100 --> 00:04:56.820 The second source of demand is B, direct use as a consumer's good. 56 00:04:56.820 --> 00:05:02.300 The third source is C, direct use as a producer's good. 57 00:05:02.300 --> 00:05:06.220 Source B can apply only to consumer's goods. 58 00:05:06.220 --> 00:05:08.520 C to producer's goods. 59 00:05:08.520 --> 00:05:11.220 The former are directly consumed. 60 00:05:11.220 --> 00:05:17.500 The latter are used in the production process and, along with other cooperating factors, 61 00:05:17.500 --> 00:05:23.020 are transformed into lower-order capital goods, which are then sold for money. 62 00:05:23.020 --> 00:05:29.380 Thus, the third source applies solely to the investing producers in their purchases of 63 00:05:29.380 --> 00:05:31.100 producers' goods. 64 00:05:31.100 --> 00:05:34.380 The second source stems from consumers. 65 00:05:34.380 --> 00:05:40.460 If we set aside the temporary speculative source, B is the source of the individual 66 00:05:40.460 --> 00:05:47.260 demand schedules for all consumers' goods, C the source of demands for all producers' 67 00:05:47.260 --> 00:05:53.760 What of the seller of the consumer's good or producer's good? 68 00:05:53.760 --> 00:05:57.120 Why is he demanding money in exchange? 69 00:05:57.120 --> 00:06:03.680 The seller demands money because of the marginal utility of money to him, and for this reason 70 00:06:03.680 --> 00:06:09.100 he ranks the money acquired above possession of the goods that he sells. 71 00:06:09.100 --> 00:06:15.400 The components and determinants of the utility of money will be analyzed in a later section. 72 00:06:15.400 --> 00:06:23.400 Thus, the buyer of a good demands it because of its direct use value either in consumption or in production. 73 00:06:23.400 --> 00:06:29.400 The seller demands money because of its marginal utility in exchange. 74 00:06:29.400 --> 00:06:35.400 This, however, does not exhaust the description of the components of market supply and demand, 75 00:06:35.400 --> 00:06:44.400 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. 76 00:06:44.400 --> 00:06:52.400 When a seller keeps his stock instead of selling it, what is the source of his reservation demand for the good? 77 00:06:52.400 --> 00:07:02.400 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. 78 00:07:02.400 --> 00:07:06.400 The sources of a reservation demand by the seller are two. 79 00:07:06.400 --> 00:07:14.400 A. Anticipation of later sale at a higher price. This is the speculative factor analyzed previously. 80 00:07:14.400 --> 00:07:18.400 And B. Direct use of the good by the seller. 81 00:07:18.400 --> 00:07:26.400 This second factor is not often applicable to producer's goods, since the seller produced the producer's good for sale, 82 00:07:26.400 --> 00:07:32.400 and is usually not immediately prepared to use it directly in further production. 83 00:07:32.400 --> 00:07:33.400 Production. 84 00:07:33.400 --> 00:07:40.260 In some cases, however, this alternative of direct use for further production does exist. 85 00:07:40.260 --> 00:07:46.440 For example, a producer of crude oil may sell it, or, if the money price falls below 86 00:07:46.440 --> 00:07:52.280 a certain minimum, may use it in his own plant to produce gasoline. 87 00:07:52.280 --> 00:07:58.640 In the case of consumers' goods, which we are treating here, direct use may also be feasible, 88 00:07:58.640 --> 00:08:09.640 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. 89 00:08:09.640 --> 00:08:17.640 However, with the great development of specialization in the money economy, these cases become infrequent. 90 00:08:17.640 --> 00:08:27.640 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, 91 00:08:57.640 --> 00:09:05.740 In the latter case, the problem is to determine how much to invest at present in the production 92 00:09:05.740 --> 00:09:13.240 of a good to be produced and sold at a point in the future rather than already given stock 93 00:09:13.240 --> 00:09:16.840 and with the reservation demand for this stock. 94 00:09:16.840 --> 00:09:21.840 In the case of production, we are dealing with investment decisions concerning how much 95 00:09:21.840 --> 00:09:45.840 Another condition that might obtain on the market is a previous buyer's re-entering the market and re-selling a good. 96 00:09:45.840 --> 00:09:50.840 For him to be able to do so, it is obvious that the good must be durable. 97 00:09:50.840 --> 00:09:58.840 A violin playing service, for example, is so non-durable that it is not resaleable by the purchasing listeners. 98 00:09:58.840 --> 00:10:19.840 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. 99 00:10:20.840 --> 00:10:36.840 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. 100 00:10:36.840 --> 00:10:43.740 It is clear that the greater the proportion of old stock to new production, other things being equal, 101 00:10:43.740 --> 00:10:51.540 the greater will tend to be the importance of the supply of old possessors compared to that of new producers. 102 00:10:51.540 --> 00:10:59.040 The tendency will be for old stock to be more important the greater the durability of the good. 103 00:10:59.040 --> 00:11:07.440 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. 104 00:11:07.440 --> 00:11:15.840 This is personal service, such as the services of a doctor, a lawyer, a concert violinist, a servant, etc. 105 00:11:15.840 --> 00:11:21.840 These services, as we have indicated previously, are, of course, non-durable. 106 00:11:21.840 --> 00:11:27.040 In fact, they are consumed by the seller immediately upon their production. 107 00:11:27.040 --> 00:11:39.740 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. 108 00:11:39.740 --> 00:11:51.040 The supply depends on the decision of whether or not to produce, supply, personal effort, not on the sale of already produced stock. 109 00:11:51.040 --> 00:11:59.540 There is no stock in this sphere, since the goods disappear into consumption immediately on being produced. 110 00:11:59.540 --> 00:12:05.540 It is evident that the concept of stock is applicable only to tangible objects. 111 00:12:05.540 --> 00:12:16.040 The price of personal services, however, is determined by the intersection of supply and demand forces, as in the case of tangible goods. 112 00:12:16.040 --> 00:12:26.040 For all goods, the establishment of the equilibrium price tends to establish a state of rest, a cessation of exchanges. 113 00:12:26.040 --> 00:12:37.040 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. 114 00:12:37.040 --> 00:12:43.160 When new production is continuing, the market will tend to be continuing, however, because 115 00:12:43.160 --> 00:12:48.440 of the inflow of new stock from producers coming into the market. 116 00:12:48.440 --> 00:12:55.200 This inflow alters the state of rest and sets the stage for new exchanges, with producers 117 00:12:55.200 --> 00:12:59.520 eager to sell their stock and consumers to buy. 118 00:12:59.520 --> 00:13:05.120 When total stock is fixed and there is no new production on the other hand, the state 119 00:13:05.120 --> 00:13:08.400 of Rest is likely to become important. 120 00:13:08.400 --> 00:13:15.400 Any changes in price or new exchanges will occur as a result of changes of valuations, 121 00:13:15.400 --> 00:13:21.300 that is, a change in the relative position of money and the good on the value scales 122 00:13:21.300 --> 00:13:26.840 of at least two individuals on the market, which will lead them to make further exchanges 123 00:13:26.840 --> 00:13:29.300 of the good against money. 124 00:13:29.300 --> 00:13:35.980 Of course, where valuations are changing, as they almost always are in a changing world, 125 00:13:35.980 --> 00:13:40.580 markets for old stock will again be continuing. 126 00:13:40.580 --> 00:13:46.100 An example of that rare type of good for which the market may be intermittent instead of 127 00:13:46.100 --> 00:13:52.220 continuous is Chippendale Chairs, where the stock is very limited and the money price 128 00:13:52.220 --> 00:13:54.180 relatively high. 129 00:13:54.180 --> 00:13:59.960 The stock is always distributed into the hands of the most eager possessors, and the trading 130 00:13:59.960 --> 00:14:02.020 may be infrequent. 131 00:14:02.020 --> 00:14:08.160 Whenever one of the collectors comes to value his Chippendale below a certain sum of money, 132 00:14:08.160 --> 00:14:14.260 and another collector values that sum in his possession below the acquisition of the furniture, 133 00:14:14.260 --> 00:14:17.380 an exchange is likely to occur. 134 00:14:17.380 --> 00:14:23.920 Most goods, however, even non-reproducible ones, have a lively continuing market because 135 00:14:23.920 --> 00:14:29.560 Because of continual changes in valuations and a large number of participants in the 136 00:14:29.560 --> 00:14:31.280 market. 137 00:14:31.280 --> 00:14:38.600 In sum, buyers decide to buy consumers goods at various ranges of price, setting aside 138 00:14:38.600 --> 00:14:46.400 previously analyzed speculative factors, because of their demand for the good for direct use. 139 00:14:46.400 --> 00:14:52.240 They decide to abstain from buying because of their reservation demand for money, which 140 00:14:52.240 --> 00:14:58.180 which they prefer to retain rather than spend on that particular good. 141 00:14:58.180 --> 00:15:04.440 Sellers supply the goods in all cases because of their demand for money, and those cases 142 00:15:04.440 --> 00:15:11.300 where they reserve a stock for themselves are due, aside from speculation on price increases, 143 00:15:11.300 --> 00:15:14.760 to their demand for the good for direct use. 144 00:15:14.760 --> 00:15:21.120 Thus, the general factors that determine the supply and demand schedules of any and all 145 00:15:21.120 --> 00:15:36.120 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. 146 00:15:36.120 --> 00:15:50.120 Although 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. 147 00:15:50.120 --> 00:16:00.120 A decision not to invest, as we have seen, is due to a competing demand to use a stock of money in the present.