 Chapter 5 of Principles of Economics Book 5, this is a LibriVox recording. All LibriVox recordings are in the public domain. For more information or to volunteer, please visit LibriVox.org. Principles of Economics Book 5 by Alfred Marshall. Equilibrium of normal demand and supply continued with reference to long and short periods. 1. Deverations in the scope of the term normal. According as the periods of time under discussion are long or short, we are indicated in Chapter 3. We are now ready to study them more closely. In this case, as in others, the economist merely brings to light difficulties that are latent in the common discourse of life. So that by being frankly faced, they may be thoroughly overcome. For an ordinary life, it is customary to use the word normal in different senses. With reference to different periods of time, and to leave the context to explain the transition from one to another. The economist follows this practice of everyday life. But by taking pains to indicate the transition, he sometimes seems to have created a complication which in fact he has only revealed. Thus, when it is said that the price of wool on a certain day was abnormally high, though the average price for the year was abnormally low, that the wages of coal miners were abnormally high in 1872 and abnormally low in 1879, that the real wages of labor were abnormally high at the end of the 14th century and abnormally low in the middle of the 16th. Everyone understands that the scope of the term normal is not the same in these various cases. The best illustrations of this come from manufacture where the plant is long-lived and the product is short-lived. When a new textile fabric is first introduced into favor, and there is very little plant suitable for making it, its normal price for some months may be twice as high as those of other fabrics which are not less difficult to make. But for making quiche, there is an abundant stock of suitable plant and scale. Looking at long periods, we may say that its normal price is on a par with that of the others. But if during the first few months a good deal of it were offered for sale in a bankrupt's stock, we might say that its price was abnormally low even when it was selling for half as much again as the others. Everyone takes the context as indicating the special use of the term in each several cases, and a formal interpretation clause is seldom necessary because in ordinary conversation, misunderstandings can be nipped in the board by question and answer. But let us look at this matter more closely. We have noticed, note 33, how a cloth manufacturer would need to calculate the expenses of producing all the different things required for making cloth, with reference to the amounts of each of them that would be wanted, and on the supposition in the first instance that the conditions of supply would be normal. But we have yet to take account of the fact that he must give to this term a wider or narrower range, according as he was looking more or less far ahead. Thus, in estimating the wages required to call for an adequate supply of labour to work a certain class of looms, he might take the current wages of similar work in the neighbourhood, or he might argue that there was a scarcity of that particular class of labour in the neighbourhood, that its current wages there were higher than in other parts of England, and that looking forward over several years so as to allow for immigration, he might take the normal rate of wages at a rather lower rate than that prevailing there at the time. Or lastly, he might think that the wages of weavers all over the country were abnormally low, relatively to others of the same grade. In consequence of a too sanguine view having been taken of the prospects of the trade half a generation ago, he might argue that this branch of work was overcrowded, that parents had already begun to choose other trades for their children, which offered greater net advantages, and yet were not more difficult, that in consequence a few years would see a falling off in the supply of labour suited for his purpose. So that looking forward a long time, he must take normal wages at a rate higher than the present average. Note 34. Again, in estimating the normal supply price of wool, he would take the average of several past years. He would make allowance for any change that would be likely to affect the supply in the immediate future, and he would reckon for the effect of such droughts as from time to time occur in Australia and elsewhere. Since their occurrence is too common to be regarded as abnormal, but he would not allow here for the chance of being involved in a great war, by which the Australian supplies might be cut off. He would consider that any allowance for this should come under the head of extraordinary trade risks, and not enter into his estimate of the normal supply price of wool. He would deal in the same way with the risk of civil tumult, or any violent and long continued disturbance of the labour market of an unusual character. But in his estimate of the amount of work that could be got out of the machinery, etc., under normal conditions, he would probably reckon for minor interruptions from trade disputes, such as are continually occurring, and are therefore to be regarded as belonging to the regular cost of events. That is, as not abnormal. In all these calculations, he would not concern himself specially to inquire how far mankind are under the exclusive influence of selfish or self-regarding motives. He might be aware that anger and vanity, jealousy and offended dignity, are still almost as common causes of strikes and lockouts, as the desire for pecuniary gain. But that would not enter into his calculations. All that he would want to know about them would be whether they acted with sufficient regularity, for him to be able to make a reasonably good allowance for their influence in interrupting work, and raising the normal supply price of the goods. Note 35. 2. The element of time is a chief cause of those difficulties in economic investigations, which make it necessary for man, with his limited powers, to go step by step, breaking up a complex question, studying one bit at a time, and at last combining his partial solutions into a more or less complete solution of the whole riddle. In breaking it up, he segregates those disturbing causes, whose wanderings happen to be inconvenient, for the time in a pound called Ceteris Paribus. The study of some group of tendencies is isolated by the assumption other things being equal. The existence of other tendencies is not denied, but their disturbing effect is neglected for a time. The more the issue is thus narrowed, the more exactly can it be handled. But also, the less closely does it correspond to real life. Each exact and firm handling of a narrow issue, however, helps towards treating broader issues, in which that narrow issue is contained, more exactly than would otherwise have been possible. With each step, more things can be let out of the pound. Exact discussions can be made less abstract. Realistic discussions can be made less inexact than was possible at an earlier stage. Note 36. Our first step towards studying the influences, exerted by the element of time on the relations between cost of production and value, may well be to consider the famous fiction of the stationary states in which those influences would be but little felt, and to contrast the results which would be found there with those in the modern world. This state obtains its name from the fact that, in it, the general conditions of production and consumption, of distribution and exchange, remain motionless. But yet, it is full of movement, for it is a mode of life. The average age of the population may be stationary, though each individual is growing up from youth towards his prime, or downwards to old age. And the same amount of things by head of the population will have been produced in the same ways by the same classes of people for many generations together. And therefore, this supply of the appliances for production will have had full time to be adjusted to the steady demand. Of course, we might assume that in our stationary states, every business remained always of the same size and with the same trade connection. But we need not go so far as that. It will suffice to suppose that firms rise and fall, but that the representative firm remains always of about the same size, as does the representative tree of a virgin forest. And that therefore, the economies resulting from its own resources are constant. And since the aggregate volume of production is constant, so also are those economies resulting from subsidiary industries in the neighborhood. That is, its internal and external economies are both constant. The price, the expectation of which just induced persons to enter the trade must be sufficient to cover in the long run the cost of building up a trade connection and a proportionate share of it must be added in to make up the total cost of production. In a stationary state then, the plain rule would be that cost of production governs value. Each effect would be attributable mainly to one cost. There would not be much complex action and reaction between costs and effects. Each element of cost would be governed by natural laws subject to some control from fixed custom. There would be no reflex influence of demand, no fundamental difference between the immediate and the latter effects of economic causes. There would be no distinction between long period and short period normal value. At all events, if we suppose that in that monotonous world, they harvest themselves their uniform. For the representative firm, being always of the same size and always doing the same class of business to the same extent and in the same way, with no slack times and no specially busy times, its normal expenses by which the normal supply prices governed would always be the same. The demand list of prices would always be the same and so would the supply lists and normal price would never vary. But nothing of this is true in the world in which we live. Here, every economic force is constantly changing its action under the influence of other forces which are acting around it. Here changes in the volume of production in its methods and in its cost are ever mutually modifying one another. They are always affecting and being affected by the character and extent of demand. Further, all these mutual influences take time to work themselves out and as a rule, no two influences move at equal pace. In this world, therefore, every plain and simple doctrine as to the relations between cost of production, demand and value is necessarily false and the greater the occurrence of lucidity which is given to it by skillful exposition, the more mischievous it is. A man is likely to be a better economist if he trusts his common sense and practical instincts than if he professes to study the theory of value and is resolved to find it easy. Three, the stationary state has just been taken to be one in which population is stationary but nearly all its distinctive futures may be exhibited in a place where population and wealth are both growing provided they are growing at about the same rate and there is no scarcity of land and provided also the methods of production and the conditions of trade change but little and above all where the character of man himself is a constant quantity. For in such a state, by far the most important conditions of production and consumption of exchange and distribution will remain of the same quality and in the same general relations to one another though they are all increasing in volume. Note 37. This relaxation of the rigid bonds of a purely stationary state brings us one step nearer to the actual conditions of life and by relaxing them still further we get nearer still. With us approached by gradual steps towards the difficult problem of the interaction of countless economic causes. In the stationary state all the conditions of production and consumption are reduced to rest but less violent assumptions are made by what is not quite accurately called the statistical method. By that method we fix our minds on some central points. We suppose it for the time to be reduced to a stationary state and we then study in relation to it the forces that affect the things by which it is surrounded and any tendency there may be to equilibrium of these forces. A number of these partial studies may lead the way towards a solution of problems too difficult to be grasped at one effort. Note 38. Four. We may roughly classify problems connected with fishing industries as those which are affected by very quick changes such as uncertainties of the weather or by changes of moderate length such as the increased demand for fish caused by the scarcity of meat during the year or two following a cattle plague. Or lastly we may consider the great increase during a whole generation of the demand for fish which might result from the rapid growth of a high strong artisan population making little use of their muscles. The day-to-day oscillations of the price of fish resulting from uncertainties of the weather, etc. are governed by practically the same causes in modern England as in the supposed stationary state. The changes in the general economic conditions around us are quick but they are not quick enough to affect perceptibly the short period normal level about which the price fluctuates from day to day and they may be neglected. Square brackets open, impounded in Ceteris paribus square bracket closes during a study of such fluctuations. Let us then pass on and suppose a great increase in the general demand for fish such for instance as might arise from a disease affecting farmstock by which meat was made a clear and dangerous food for several years together. We now impound fluctuations due to the weather in Ceteris paribus and neglect them provisionally. They are so quick that they speedily obliterate one another and are therefore not important for problems of this class. And for the opposite reason we neglect variations in the numbers of those who are brought up as seafaring men. For these variations are too slow to produce much effect in the year or two during which the scarcity of meat lasts. Having impounded these two sets for the time we give our full attention to such influences as the inducements which good fishing wages will offer to sailors to stay in their fishing homes for a year or two instead of applying for work on a ship. We consider what old fishing boats and even vessels that were not specially made for fishing can be adapted and sent to fish for a year or two the normal price for any given daily supply of fish which we are now seeking is the price which will quickly call into the fishing trade capital and labor enough to obtain that supply in a day's fishing of average good fortune. The influence which the price of fish will have upon capital and labor available in the fishing trade being governed by rather narrow courses such as this. This new level about which the price oscillates during these years of exceptionally great demand will obviously be higher than before. Here we see an illustration of the almost universal law that the term normal being taken to refer to a short period of time and increase in the amount demanded raises the normal supply price. This law is almost universal even as regards industries which in long periods follow the tendency to increase in return Note 39 but if we turn to consider the normal supply price with reference to a long period of time we shall find that it is governed by a different set of courses and with different results. For suppose that the disuse of meat causes a permanent distaste for it and that an increased demand for fish continues long enough to enable the forces by which its supply is governed to work out their action fully, bracket opens. Of course, oscillation from day to day and from year to year would continue but we may leave them on one side. Bracket closes. The source of supply in the sea might perhaps show signs of exhaustion and the fishermen might have to resort to more distant coasts and to deeper waters. Nature giving a diminishing return to the increased application of capital and labor of a given order of efficiency. On the other hand those might turn out to be right who think that man is responsible for but a very small part of the destruction of fish that is constantly going on. And in that case a boat starting with equally good appliances and an equally efficient crew would be likely to get nearly as good a haul after the increase in the total volume of the fishing trade as before. In any case, the normal cost of equipping a good boat with an efficient crew would certainly not be higher and probably be a little lower after the trade had settled down to its now increased dimensions than before. For since fishermen require only trained attitudes and not any exceptional natural qualities their number could be increased in less than a generation to almost any extent that was necessary to meet the demand. While the industries connected with building boats making nets, etc. being now on a larger scale would be organized more thoroughly and economically. If therefore the waters of the sea showed no signs of depletion of fish an increased supply could be produced at a lower price after a time sufficiently long to enable the normal action of economic causes to work itself out. And the term normal being taken to refer to a long period of time the normal price of fish would decrease with an increase in demand Note 40 Thus, we may emphasize the distinction already made between average price and normal price. An average may be taken of the prices of any set of sales extending over a day or a week or a year or any other time or it may be the average of sales at any time in many markets or it may be the average of many such averages but the conditions which are normal to any one set of sales are not likely to be exactly those which are normal to the others and therefore it is only by accident that an average price would be a normal price that is the price which any one set of conditions tends to produce In a stationary state alone as we have just seen the term normal always means the same thing there but only there Average price and normal price are convertible terms Note 41 5. To go over the ground in another way market values are governed by the relation of demand to stocks actually in the market with more or less reference to future supplies and not without some influence of trade combinations but the current supply is in itself partly due to the action of producers in the past and this action has been determined on as a result of a comparison of the prices which they expect to get for their goods with the expenses to which they will be put in producing them The range of expenses of which they take account depends on whether they are merely considering the extra expenses of certain extra production with their existing plants or are considering whether to lay down new plant for the purpose In the case for instance of an order for a single locomotive which was discussed a little while ago Note 42 The question of readjusting the plant to demand would hardly arise The main question would be whether more work could conveniently be got out of the existing plant but in view of an order for a large number of locomotives to be delivered gradually over a series of years some extension of plant specially made for the purpose and therefore truly to be regarded as prime marginal cost would almost certainly be carefully considered whether the new production for which there appears to be a market be large or small the general rule will be that unless the price is expected to be very low that portion of the supply which can be most easily produced with but small prime costs will be produced that portion is not likely to be on the margin of production as the expectations of price improve an increased part of the production will yield a considerable surplus above prime costs and the margin of production will be pushed outwards every increase in the price expected will as a rule induce some people who would not otherwise have produced anything to produce a little and those who have produced something for the lower price will produce more for the higher price that's part of their production with regard to which such persons are on the margin of doubt as to whether it is worthwhile for them to produce it at the price is to be included together with that of the persons who are in doubt whether to produce at all the two together constitute the marginal production at that price the producers who are in doubt whether to produce anything at all may be said to lie altogether on the margin of production or if they are agriculturists on the margin of cultivation but as a rule they are very few in number and their action is less important than that of those who would in any case produce something the general drift of the term normal supply price is always the same whether the period to which it refers is short or long but there are great differences in detail in every case reference is made to a certain given rate of aggregate production that is to the production of a certain aggregate amount daily or annually in every case the price is that the expectation of which is sufficient and only just sufficient to make it worthwhile for people to set themselves to produce that aggregate amount in every case the cost of production is marginal that is it is the cost of production of those goods which are on the margin of not being produced at all and which would not be produced if the price to be got for them were expected to be lower but the causes which determine this margin vary with the length of the period under consideration for short periods people take the stock of appliances for production as practically fixed and they are governed by the expectations of demand in considering how actively they shall set themselves to work those appliances in long periods they set themselves to adjust the flow of these appliances to the expectations of demand for the goods which the appliances help to produce let us examine this difference closely 6. The immediate effect of the expectation of a high price is to cost people to bring into active work all their appliances of production and to work them full time and perhaps over time the supply price is then the money cost of production of that part of the produce which forces the undertaker to hire such inefficient labor perhaps tired by working overtime at so high a price and to put himself and others to so much strain and inconvenience that he is on the margin of doubt whether it is what is well to do it or not the immediate effect of the expectation of a low price is to throw many appliances for production out of work and slacken the work of others and if the producers had no fear of spoiling their markets it would be worth their while to produce for a time for any price that covered the prime costs of production and rewarded them for their own trouble but as it is they generally hold out for a higher price each man fears to spoil his chance of getting a better price later on from his own customers or if he produces for a large and open market he is more or less in fear of incurring the resentment of other producers should he sell needlessly at a price that spoils the common market for all the marginal production in this case is the production of those whom a little further fall of price would cost either from a regard to their own interest or by formal or informal agreement with other producers to suspend production for fear of further spoiling the market the price which for these reasons producers are just on the point of resusing is the true marginal supply price for short periods it is nearly always above and generally very much above the special or prime cost for raw materials labor and wear and tear of plants which is immediately and directly involved by getting a little further use out of appliances which are not fully employed this point needs further study in a trade which uses very expensive plants the prime cost of goods is but a small part of the total cost and an order at much less than the normal price may leave a large surplus above their prime cost but if producers accept such orders in their anxiety to prevent their plant from being idle they gloss the market and tend to prevent prices from reviving in fact however they seldom pursue this policy constantly and without moderation if they did they might ring many of those in the trade themselves perhaps among the number and in that case a revival of demand would find little response in supply and would raise violently the prices of the goods produced by the trade extreme variations of this kind are in the long run beneficial neither to producers nor to consumers and general opinion is not altogether hostile to that code of trade morality which condemns the action of anyone who spoils the market by being too ready to accept a price that does little more than cover the prime cost of his goods and allows but little on account of his general expenses note 43 for example if at any time the prime cost in the narrowest sense of the word of a bill of clothes is 100 and if another 100 are needed to make the cloth pay its due share of the general expenses of the establishment including normal profits to its owners then the practically effective supply price is perhaps not very likely to fall below 150 under ordinary conditions even for short periods though of course a few special bargains may be made at lower prices without much affecting the general market thus although nothing but prime cost enters necessarily and directly into the supply price for short periods it is yet true that supplementary costs also exert some influence indirectly a producer does not often isolate the cost of each separate small parcel of his output he is apt to treat a considerable part of it even in some cases the whole of it more or less as a unit he inquires whether it is what is well to add a certain new line to his present undertakings whether it is worthwhile to introduce a new machine and so on he treats the extra output that will result from the change more or less as a unit beforehand and afterwards he quotes the lowest prices which he is willing to accept with more or less reference to the whole cost of that extra output regarded as a unit in other words he regards an increase in his processes of production rather than an individual parcel of his products as a unit in most of his transactions and the analytical economist must follow suit if he will keep in close touch with actual conditions these considerations tend to blow the sharpness of outline of the theory of value but they do not affect its substance note 44 to sum up then as regards short periods the supply of specialized skill and ability of suitable machinery and other material capital and of the appropriate industrial organization has not time to be fully adapted to demand but the producers have to adjust their supply to the demand as best as they can with the appliances already at their disposal on the one hand there is not time materially to increase those appliances if the supply of them is deficient and on the other if the supply is excessive some of them must remain imperfectly employed since there is not time for the supply to be much reduced by gradual decay and by conversion to other uses variations in the particular income derived from them do not for the time affect perceptibly the supply and do not directly affect the price of the commodities produced by them the income is a surplus of total receipts over prime cost that is it has something of the nature of a rent it will be seen more clearly in chapter 8 but unless it is sufficient to cover in the long run a fair share of the general cost of the business production will gradually fall off in this way a controlling influence over the relatively quick movements of supply price during short periods is exercised by causes in the background which range over a long period and the fear of spoiling the market often makes those causes act more promptly than they otherwise would 7. In long periods on the other hand all investments of capital and effort in providing the material plant and the organization for business and in acquiring trade knowledge and specialized ability have time to be adjusted to the incomes which are expected to be earned by them and the estimates of those incomes therefore directly govern supply and at the true long period no more supply price of the commodities produced a great part of the capital invested in the business is generally spent on building up its eternal internal organization and its external trade connections if the business does not prosper all that capital is lost even though its material plant may realize a considerable part of its original cost and anyone proposing to start a new business in any trade must reckon for the chance of this loss if himself a man of normal capacity for that class of work he may look forward long to his business being a representative one in the sense in which we have used this term with its fair share of the economies of production on a large scale if the net enemies of such a representative business seem likely to be greater than he could get by similar investments in other trades to which he has access he will choose this trade thus, that investment of capital in a trade on which the price of the commodity produced by it depends on the long run is governed by estimates on the one hand of the outgoings required to build up and to work a representative theme and on the other of the incumbents spread over a long period of time to be got by such a price at any particular moment some businesses will be rising and others falling but when we are taking a broad view of the causes which govern normal supply price we need not trouble ourselves with these eddies on the surface of the great tide any particular increase of production may be due to some new manufacturer who is struggling against difficulties working with insufficient capital and enduring great privations in the hope that he may gradually build up a good business or it may be due to some wealthy firm which by enlarging its premises is enabled to attain new economies and thus obtain a larger output at a lower proportionate cost and as this additional output will be small relatively to the aggregate volume of production in the trade it will not much lower the price so that the firm will reap great gains from its successful adaptation to its surroundings but while these variations are occurring in the fortunes of individual businesses there may be a steady tendency of the long period normal supply price to diminish as a direct consequence of an increase in the aggregate volume of production 8. Of course there is no hard and sharp line of division between long and short periods nature has drawn no such lines in the economic conditions of actual life and in dealing with practical problems they are not wanted just as we contrast civilized with uncivilized races and establish many general propositions about either group though no hard and fast division can be drawn between the two so we contrast long and short periods without attempting any rigid demarcation between them if it is necessary for the purposes of any particular argument to divide one case sharply from the other it can be done by a special interpretation clause but the occasions on which this is necessary are neither frequent nor important 4. Classes stand out In each, price is governed by the relations between demand and supply As regards market prices supply is taken to mean the stock of the commodity in question which is on hand or at all events in sight As regards normal prices when the term normal is taken to relate to short periods of a few months or a year supply means broadly what can be produced for the price in question with the existing stock of plants personal and impersonal in the given time As regards normal prices when the term normal is to refer to long periods of several years supply means what can be produced by plants which itself can be relatively produced and applied within the given time while lastly there are very gradual or circular movements of normal price caused by the gradual growth of knowledge of population and of capital and the changing conditions of demand and supply from one generation to another Note 45 The remainder of the present volume is chiefly concerned with the third of the above classes that is with the normal relations of wages profits, prices etc. for rather long periods but occasionally account has to be taken of changes that extend over very many years and one chapter Book 6, Chapter 12 is given up to the influence of progress on value that is to the study of circular changes of value Notes for Marshall Principles of Economics Book 5, Chapter 5 Note 33 See Book 5, Chapter 3, Section 5 Notes 34 There are indeed not many occasions on which the calculations of a businessman for practical purposes need to look forward so far and to extend the range of the term normal over a whole generation but in the broader applications of economic science it is sometimes necessary to extend the range even further and to take account of the slow changes that in the course of centuries affect the supply price of the labour of each industrial grade Notes 35 Compare Book 1, Chapter 2, Section 7 Notes 36 As has been explained in the prefix pages 6 to 9 this volume is concerned mainly with normal conditions and these are sometimes described as statical but in the opinion of the present writer the problem of normal value belongs to economic dynamics partly because statics is really but a branch of dynamics and partly because all suggestions as to economic rest of which the hypothesis of a stationary state is the chief are merely provisional used only to illustrate particular steps in the argument and to be thrown aside when that is done Notes 37 See below Book 5, Chapter 11 Section 6 and compare kinds, scope and method of political economy Book 6, Chapter 2 Notes 38 Compare the preface and appendix H Section 4, Notes 39 See Book 5, Chapter 11 Section 1 Note 40 Took History of Prizes, Volume 1, Page 104 tells us there are particular articles of which the demand for naval and military purposes forms so large a proportion to the total supply that no diminution of consumption by individuals can keep pace with the immediate increase of demand by government and consequently the breaking out of a war tends to raise the price of such articles to a great relative height but even of such articles if the consumption were not on a progressive scale of increase so rapid that the supply of all the encouragement of a relatively high price could not keep pace with the demand The tendency is supposing no impediment natural or artificial to production or importation to occasion such an increase of quantity as to reduce the price to nearly the same level as that from which it had advanced Finally, it will be observed by reference to the table of prizes that salt, hemp, iron, etc. after advancing very considerably under the influence of a greatly extended demand for military and naval purposes tended downwards again whenever that demand was not progressively and rapidly increasing Thus, a continuously progressive increase in demand may raise the supply price of a thing even for several years together though a steady increase of demand for that thing at a rate not too great for supply to keep pace with it with lower price Note 41 Book 5, Chapter 3, Section 6 The distinction will be yet further discussed in Book 5, Chapter 12 and Appendix H See also Times, Scoop and Method of Political Economy Chapter 7 Note 42 Page 360 all the way to 367 Note 43 Where there is a strong combination Tassit or Ovat Producers may sometimes regulate the price for a considerable time together with very little reference to cost of production and if the leaders in that combination were those who had the best facilities for production it might be said in apparent do-not-in-real contradiction to Ricardo's doctrines that the price was governed by that part of the supply which was most easily produced but as a fact those producers whose finances are weakest and who are bound to go on producing to escape failure often impose their policy on the rest of the combination in so much that it is a common saying both in America and England that the weakest members of a combination are frequently its rulers Note 44 This general description may suffice for most purposes but in Chapter 11 there will be found a more detailed study of that extremely complex notion a marginal increment in the process of production by a representative firm together with a fuller explanation of the necessity of referring our reasoning to the circumstances of a representative firm especially when we are considering industries which show a tendency to increase in return Note 45 Compare the first section of this chapter Of course the periods required to adapt the several factors of production to the demand may be very different The number of skilled composers for instance cannot be increased nearly as fast as the supply of type and printing presses and this cost alone would prevent any rigid division being made between long and short periods but in fact a theoretically perfect long period must give time enough to enable not only the factors of production of the commodity to be adjusted to the demand but also the factors of production of those factors of production to be adjusted and so on and this when carried to its logical consequences will be found to involve the supposition of a stationary state of industry in which the requirements of your future age can be anticipated an indefinite time beforehand Some such assumption is indeed unconsciously implied in many popular renderings of Ricardo's theory of value if not in his own versions of it and it is to this course more than any other that we must attribute that simplicity and sharpness of outline from which the economic doctrines in fashion in the first half of this century derived some of their seductive charm as well as most of whatever tendency they may have to lead to false practical conclusions Relatively short and long period problems go generally on similar lines In both, use is made of that paramount device the partial or total isolation for special study of some set of relations In both, opportunity is gained for analyzing and comparing similar episodes and making them through light upon one another and for ordering and coordinating facts which are suggestive in their similarities and are still more short period problems No great violence is needed for the assumption that the forces not specially under consideration may be taking for the time to be inactive But violence is required for keeping broad forces in the palm of Ceteris paribus during, say, a whole generation on the ground that they have only an indirect bearing on the question in hand for even indirect influences may produce great effects in the course of a generation if they happen to act cumulatively and it is not safe to ignore them even provincially in a practical problem without special study Thus, the uses of the statistical method in problems relating to very long periods are dangerous Care and forethought and self-restraint are needed at every step The difficulties and risks of the task reach their highest point in connection with industries which conform to the law of increasing return and it is just in connection with those industries that the most alluring applications of the method are to be found We must postpone these questions to Chapter 12 and Appendix H But an answer may be given here to the objection that since the economic world is subject to continual changes and is becoming more complex the longer the run the more hopeless the rectification so that to speak of that position which value tends to reach in the long run is to treat variables as constants Devas, Political Economy Book 4, Chapter 5 It is true that we do not it is true that we do treat variables provincially as constants but it is also true that this is the only method by which science has ever made progress in dealing with complex and changeful matter whether in the physical or moral world See above Chapter 5, Book 5, Section 2 End of Chapter 5 of Book 5 Chapter 6 of Principles of Economics, Book 5 This is the LibriVox recording All LibriVox recordings are in the public domain For more information or to volunteer please visit LibriVox.org Principles of Economics, Book 5 by Alfred Marshall Chapter 6 Joint and Composite Demand Joint and Composite Supply Bread satisfies man's wants directly and the demand for it is said to be direct but a flour mill and an oven supply wants only indirectly by helping to make bread, etc. and the demand for them is said to be indirect More generally, the demand for raw materials and other means of production is indirect and is derived from the direct demand for those directly serviceable products which they help to produce The services of the flour mill and the oven are joined together in the ultimate product, bread The demand for them is therefore called a joint demand Again, hops and malt are complementary to one another They are joined together in the common destination of ale and so on Thus the demand for each of the several complimentary things is derived from the services which they jointly render in the production of some ultimate product as for instance, a loaf of bread, a cask of ale In other words, there is a joint demand for the services which any of these things render in helping to produce a thing which satisfies wants directly and for which there is therefore a direct demand The direct demand for the finished product is in effect split up into many derived demands for the things used in producing it To make another illustration The direct demand for houses gives rise to a joint demand for the labor of all the various building trades and for bricks, stone, wood, etc. which are factors of production of building work of all kinds or as we may say for shortness of new houses The demand for any one of these as for instance, the labor of plasterers is only an indirect or derived demand Let us pursue this last illustration with reference to a class of events that are frequent occurrence in the labor market The period over which the disturbance extends being short and the causes of which we have to take into account as readjusting demand and supply being only such as are able to operate within that short period This case has important practical bearings which give it a special claim on our attention but we should notice that referring as it does to short periods it is an exception to our general rule of selecting illustrations in this and the neighboring chapters from cases in which there is time enough for the full long period action of the forces of supply to be developed Let us then suppose that the supply and demand for building being an equilibrium there is a strike on the part of one group of workers say the plasterers or that there is some other disturbance to the supply of the plasterers labor in order to isolate and make a separate study of the demand for that factor we suppose firstly that the general conditions of the demand for new houses remain unchanged that is that the demand schedule for new houses remains valid and secondly we assume that there is no change in the general conditions of supply of the other factors two of which are of course business faculties and business organizations of the master builders that is we assume that their lists of supply prices also remain valid then a temporary check to the supply of plasterers labor will cause a proportionate check that the demand price for the diminished number of houses will be a little higher than before and the supply prices of the other factors of production will not be greater than before thus new houses can now be sold at prices which exceed by a good margin the sum of the prices at which these other requisites for the production of houses can be bought and that margin gives the limit to the possible rise of the price that will be offered for plasterers labor on the supposition that plasterers labor is indispensable the different amounts of this margin corresponding to different checks to the supply of plasterers labor are governed by the general rule that the price that will be offered for anything used in producing a commodity is for each separate amount of the commodity limited to the excess of the price at which that amount of the commodity can find purchasers over the sum of the prices at which the corresponding suppliers of other needed for making it will be forthcoming to use technical terms the demand schedule for any factor of production of a commodity can be derived from that for the commodity by subtracting from the demand price of each separate amount of the commodity the sum of the supply prices for corresponding amounts of the other factors when however we come to apply this theory to the actual conditions of life it is important to remember that if the supply of one factor is disturbed the supply of the others is likely to be disturbed also in particular when the factor of which the supply is disturbed is one class of labor as that of the plasterers the employers earnings generally act as a buffer that is to say the loss falls in the first instance on them but by discharging some of their workmen and lowering the wages of others among the other factors of production the details of the process by which this is affected are various and depend on the actions of trade combinations on the higgling and bargaining of the market and on other causes with which we are not just at present concerned let us inquire what are the conditions under which a check to the supply of a thing that is wanted not for direct use but as a factor of production of some commodity may cause a very great rise in its price the first condition is that the factor itself should be essential or nearly essential to the production of the commodity no good substitute being available at a moderate price the second condition is that the commodity in the production of which it is a necessary factor should be one for which the demand is stiff and inelastic so that a check to its supply will cause consumers to offer a much increased price for it without it and this of course includes the condition that no good substitutes for the commodity are available at a price but little higher than its equilibrium price if the check to house building raises the price of houses very much builders anxious to secure the exceptional profits will bid against one another for such plasterers labor as there is in the market the third condition is that only a small part of the expenses of production of the commodity should consist of the price of this factor since the plasterers wages are but a small part of the total expenses of building a house a rise of even 50% in them would add but a very small percentage to the expenses of production of a house and would check demand but little the fourth condition is that even a small check to the amount demanded should cause a considerable fall in the supply prices of other factors of production as that will increase the margin available for paying a high price for this one if for instance bricklayers and other classes of workmen or the employers themselves cannot easily find other things to do and cannot afford to remain idle they may be willing to work for much lower earnings than before and this will increase the margin available for paying higher wages to the plasterers these four conditions are independent and the effects of the last three are cumulative the rise in plasterers wages would be checked if it were possible either to avoid the use of the plasterer or to get the work done tolerably well and at a moderate price by people outside the plasterers trade the tyranny which one factor of production of a commodity might in some cases exercise over other factors through the action of derived demand is tempered by the principle of substitution again an increased difficulty in obtaining one of the factors of a finished commodity can often be met by modifying the character of the finished product some plasterers labor may be indispensable but people are often in doubt how much plaster work it is worthwhile to have in their houses and if there is a rise in the price they will have less of it the intensity of the satisfaction of which they would be deprived if they had a little less of it is its marginal utility the price which they are just willing to pay in order to have it is the true demand price for plasterers work up to the amount which is being used so again there is a joint demand for molten hops in ale but their proportions can be varied a higher price can be got for an ale which differs from others only in containing more hops and this excess price represents the demand for hops the relations between plasterers bricklayers etc are representative of much that is both instructive and romantic in the history of alliances and conflicts between trade unions and allied trades but the most numerous instances of joint demand are those for the demand for a raw material and the operatives who work it up as for instance cotton or jute or iron or copper and those who work up those several materials again the relative prices of different articles of food vary a good deal with the supply of skilled cooks labour thus for instance many kinds of meat and many parts of vegetables which are almost valueless in America where skilled cooks are rare and expensive have a good value in France where the art of cooking is widely diffused we have already discussed the way in which the aggregate demand for any commodity is compounded up the demands of people who may need it but we now may extend this notion of composite demand to requisites of production which are needed by several groups of producers nearly every raw material and every kind of labour is applied in many different branches of industry and contributes to the production of a great variety of commodities each of these commodities has its own direct demand and from that the derived demand for any of the things used that can be found and the thing is distributed between its various uses in the manner in which we have already discussed the various uses are rivals or competitors with one another and the corresponding derived demands are rival or competitive demands relatively to one another but in relation to the supply of the product they cooperate with one another being compounded into the total demand that carries off the supply in just the same way as the partial demands of several classes of society for a finished commodity are aggregated or compounded together into the total demand for it we may now pass to consider the case of joint products i.e. of things which cannot easily be produced separately but are joined in a common origin and may therefore be said to have a joint supply such as beef and hides or wheat and straw this case corresponds to that of things which have a joint demand and it may be discussed almost in the same words by merely substituting demand for supply and vice versa as there is a joint demand for things joined in a common destination so there is a joint supply of things which have a common origin the single supply of the common origin is split up into so many derived supplies of the things that proceed from it for instance since the repeal of the corn laws much of the wheat consumed in England has been imported and of course without any straw this has caused a scarcity and a consequent rise in the price of straw and the farmer who grows the wheat looks to the straw for a great part of the value of the crop the value of the straw then is high in the countries which import wheat and low in those which export wheat in the same way the price of mutton in the wool producing districts of Australia was at one time very low the wool was exported the meat had to be consumed at home and as there was no great demand for it the price of the wool had to defray almost the whole of the joint expenses of production of the wool and the meat afterwards the low price of meat gave a stimulus to the industries of preserving meat for exportation and now its price in Australia is higher there are very few cases of joint products the cost of production of both of which together is exactly the same as that of one of them alone so long as any product of a business has a market value it is almost sure to have devoted to it some special care and expense which would be diminished or dispensed with if the demand for that product were to fall very much thus for instance if the straw were valueless farmers would exert themselves more than they do to make the ear bear as large a proportion as possible to the stock the importation of foreign wool has caused English sheep to be adapted by judicious crossing and selection so as to develop heavy weights of good meat at an early age even at the expense of some deterioration of their wool it is only when one of two things produced by the same process is valueless, unsalable and yet does not involve any expense for its removal that there is no inducement to attempt to alter its amount and it is only in these exceptional cases that we have no means of assigning its separate supply price to each of the joint products for when it is possible to modify the proportions of these products we can ascertain what part of the whole expense of the process of production would be saved by so modifying these proportions as slightly to diminish the amount of one of the joint products without affecting the amounts of the others that part of the expense is the expense of production the marginal element of that product it is the supply price of which we are in search but these are exceptional cases it more frequently happens that a business or even an industry finds its advantage in using a good deal of the same plant, technical skill and business organization for several classes of products in such cases the cost of anything used for several purposes has to be defrayed by its fruits in all of them but there is seldom any rule of nature to determine either the relative importance of these uses or the proportions in which the total cost should be distributed among them much depends on the changing features of markets we may pass to the problem of composite supply which is analogous to that of composite demand the demand can often be satisfied by any one of several routes according to the principle of substitution these various routes are rivals or competitors with one another and the corresponding supplies of commodities are rival or competitive with supplies relatively to one another but in relation to the demand they cooperate with one another being compounded into the total supply that meets the demand if the causes which govern their production are nearly the same they may for many purposes be treated as one commodity for instance beef and mutton may be treated as varieties of one commodity for many purposes as separate for others as for instance for those in which the question of the supply of wool enters rival things are however often not finished commodities but factors of production for instance there are many rival fibers which may be used in making ordinary printing paper we have just noticed how the fierce action of derived demand for one of several complementary supplies as e.g. for the supply of plasterers labor was liable to be moderated when the demand was met by the competitive supply of a rival thing which could be substituted for it all the four chief problems which have been discussed in this chapter have some bearing on the causes that govern the value of almost every commodity and many of the most important cross connections between the values of different commodities are not obvious at first sight thus when charcoal was generally used in making iron the price of leather depended in some measure on that of iron and the tanners petitioned for the exclusion of foreign iron in order that the demand on the part of English iron smelters for oak charcoal might cause the production of English oak to be kept up and thus prevent oak bark from becoming deer this instance may serve to remind us of the way in which an excessive demand for a thing may cause its sources of supply to be destroyed and thus renders scarce any joint products that it may have for the demand of wood on the part of the iron makers led to a relentless destruction of many forests in England again an excessive demand for lamb was assigned as a cause for the prevailing scarcity of sheep some years ago while some argued to the contrary that the better the price to be got for spring lamb sold to the rich the more profitable would be the production of sheep and the cheaper would mutton be for the people the fact is that an increase of demand may have opposite effects according as it does or does not act so suddenly as to prevent producers from adapting their action to it again the development of railways and other means of communication for the benefit of one trade as for instance wheat growing in some parts of America and silver mining in others greatly lowers some of the chief expenses of production of nearly every other product of those districts again the prices of soda and bleaching materials and other products of industries the chief raw material of which is salt move up and down relatively to one another with almost every improvement in the various processes which are used in those industries and every change in those prices affects the prices of many other goods for the various products of the salt industries are more or less important factors in many branches of manufacture again cotton and cotton seed oil are joint products and the recent fall in the price of cotton is largely due to improved manufacture and uses of cotton seed oil and further as the history of the cotton famine shows the price of cotton largely affects that of wool linen and other things of its own class while cotton seed oil is ever opening up new rivalries with things of its own class again many new uses have been more straw in manufacture and these inventions are giving value to straw that used to be burnt in the west of America and tend to hinder the rise of the marginal cost of producing wheat End of Chapter 6 Chapter 7 of Principles of Economics Book 5 This is a LibriVoyce Recording All LibriVoyce Recording are in the public domain For more information please visit LibriVoyce.org Principles of Economics Book 5 by Anne-François Marceau Chapter 7 Bram and TotuCars in relation to joint brothers Casa Marketing Incidents Against Rich Casa Pre-Production We may now return to consideration of Bram and supplementary cars with special reference to the proper distribution of the later between the joint brothers of a business It often happens that a thing making one branch of a business is used as a raw material in another and then the question of the relative profitiveness of the two branches can be accurately as certain only by an elaborate system of bookkeeping by Dublin Dry Though in brothers it is more common to rely on rough estimates made by an almost instinctive guess Some of the best illustration of this difficulty are found in agriculture especially when the same farm combines permanent pasture and arable land walk along rotation Another difficult case is that of the safe owner who portioned the expenses of his safe between heavy goods and goods that are punky but not heavy He tries, as fast as may be to get a missed cargo or pulled kites and an important element in the struggle for existence of rival parts is the disadvantage under which those parts lie which are able to offer cargo only a punky part whose chief export is weighty but not punky attract his neighborhood industry would make for asbestos that can be safe from it at low freight The staff for seaporteries for example, all parts of their safe to the low freight at which their goods are carried by ship shelling from the merchant with iron and other heavy cargo but there is free competition in the seap owning trade and it has great powers of variation as regards the size and size of seaps the route with the tech and the whole method of trading and thus, in many ways the general principle can be applied that the relative promotion of the John Brothers of a business will modify that the marginal expense of production of either brothers should be equal to its marginal demand price or in other words the amount of carrying power of each kind of cargo has a constant tendency to move toward equally brilliant at the point at which the demand price for that amount in the normal state of trade is just sufficient to cover the expenses of providing it this expensive being reckoned so as to include not only its money-pram cost but also own general expensive of the business which are in long run incurred on this account whether directly or indirectly in some branches of manufacturers it is customary to make a first approximation of producing any class of goods by assuming that the share of the general expensive of the business is proportionate either to their prime cost or to the special labor bill that is incurred in making them correction can be made to meet such cases as those of goods would require either more or less than an average share of space or of the use of expensive machinery and so on there are two elements of the general expensive of a business the sharing of which between the different branches requires some special attention there are the expensive of marketing and that of insurance again rich some kinds of goods are easily marketed there is a steady demand for them and it is always safe to make them for stock but for that very reason competition cuts their price verify and does not allow a large margins above the direct cost of making them sometimes the task of making and sharing them can be rendered almost automatic so as to require very little to be tracked on their account while under the head of the expensive of management and marketing but in product it is not uncommon to track such goods with even less than the small share that would probably form to them and to use them as a means of obtaining and maintaining a business connection that will facilitate the marketing of all the classes of goods the production of which will not so well be reduced to routine for us to this there is not so close a competition manufacturers especially in trades connected with furniture and rash and retailers in almost own trades frequently finds best to use certain of their goods as a means of advertising orders and to chart the first with less and the second with more than their proportionate share of supplementary is fancy in the former class they bought those goods with so uniform in character and so largely consume that nearly all purchasers know their value well in the second those with regard to which purchaser think more of consulting their fancy than buying at a lowest possible price own difficulties of this kind are much increased by that instability of supply price what results whenever the tendency to increasing return is acting strongly we have seen that in seeking the normal supply price in such cases we must select as representative of business which is managed with no more ability and so as to get this fair share of the economies both internal and external resulting from industrial organization also that this economy though they fluctuate with fortunes of particular business yet increase generally when the every great productions increases now it is obvious that if a manufacturer make a commodity that increases production of which would put largely increased internal economy within his reach it is worth it why to sacrifice a great deal in order to boost itself in a new market if he has a large capital and the commodities is won in much demand his expenditures for this purpose may be very great even is seen in that worth he devotes directly to the manufacturers and if as is likely he is pushing at the same time several other commodities nothing more than a very rough guess can be made as to what share of this expenditure should be charged to the sale of each of them in the current year there should be charged to the connection what he is endeavouring to build up for them in the future in fact when the production of a commodity confirms to the law of increasing return in such a ways as to give a very great advantage to large producers ATF to form almost entirely into the hands of a few large firms and then the normal marginal supply price cannot be isolated on the plan just preferred because thus plan assuming the existence of a great many competitors with businesses of own size some of them being young and some old some in the ascending and some in the descending phase the productions of such a commodity partakes in a great measure of the nature of a monopoly and its price is likely to be so much influence by the incidence of the campaign between rival producers it's struggling for an extension of territory as clearly to have a true normal level economic progress is constantly offering a new facility for marketing use at a distance it's not only lower cost of carriage but what is often more important it enables producers and customers in distant places to get in touch with one another in spite of this the advantages of the producer who live on the spot are very great in many trades he often enable him to hold his own against competitors at a distance whose methods of producers are more economical he can sell his own neighborhood as cheaply as they can because though the cost of making is greater for his goods than for theirs he escapes much of the cost worth they incur from marketing but time is on the side of the more economic methods of producing his distant competitors will gradually get a stronger footing in the place unless he or some new man adopts their improved methods it remains to make a closer study of the relation in which incident again reach of a business stand to the supply price of any particular commodity produced in it season 3 the manufacturers and the trader commonly insure against injury by fight and loss at sea and the premium which they pay are among the general expensive a share which has to be added to the bram cost in order to determine the total cost of their goods but no incident can be affected against the great majority of business rich even as regards lucy by fight and see insurance company have to allow for possible carelessness and fraud and must therefore independently of all allowance for their own expensive and profits shock premium considerably higher than the true equivalent of the rich run by the buildings of the safe and those who manage their affair well the injury done by fight or see however is likely if it occur as at all to be so very great that it is generally worthwhile to pay this extra trust partly for special trade reason but chiefly because the total utility of increasing well increases less than in proportion to its amount but the greater parts of business rich are so in separately connected with the general management of the business that an insurance company which undertook them would really make itself responsible for their business and in consequent every firm has to act as its own incident office with regard to them the charges to which it is put under this head are part of its general expensive and a share of them has to be added to the prime cost of its product but here there are two difficulties in some cases incident against rich is to be left out of account together in others it is to be called try over thus a large shape owner sometimes declares to ensure he is safe with the underwriter and set aside part and list of their premiums that he might have back to them to build up an insurance firm of his own still when calculating the total cost of working safe add to its prime cost attract on account of incidents and he must do the same thing in some form of orders with regard to the rich against which he could not buy an insurance policy on reasonable terms even if he wanted to at times for instance some of his safe will be idle in part or will earn only nominal freight and to make his business remunerative in the long run he must in some form or other truck has several voyages with an incident premium to make up for his losing on those with unsuccessful in general however he does this not by making a formal entry to his account under a separate half but by the simple plan of taking the average of successful and unsuccessful voyages together and when that has once been done insurance against this rate cannot be entered as a separate item in cost of productions the same thing tried over having decided to run this race himself he is likely to spend a little more than the average of his competitors in providing against their occurrence and this extra expense enters in the ordinary wave into his currency it is really an incident premium in other forms and therefore he must not count incident against his part of the rich separately for then he would be counting at twice over when a manufacturer has taken the average of himself of brass material over a long time and paces his future actions on the result of his past experience he has already allowed for the rich that the machinery will be depreciated by new inventions renderings is nearly obsolete and for the rich that his goods will be depreciated by changes in fast sense if he were to allow separately for incident against this rich he would be counting the same thing section 4 thus though when we have counted of the average of a risky trade we must not make a separate phone allowance for incident against rich though there may be something to be allowed as a charge on the count of uncertainty 82,000 on adventurous occupation such as gold mining as special attraction for some people the deterrent force a breach of loss in this is less than attractive force of changes of a great gain even when the value of later estimated on the actual principle it must less than that of the former and as Adam Smith pointed out a risky trade in which there is an element of bromance often becomes so overcrowded that the average earnings in it are lower than if there are no risk to be run but in the large majority of cases the influence of breach is in the opposite direction a railway stock that is certain to pay 4% will sell for higher prices that one which is equal likely to pay 1% or 7% or any intermediate amount every trade then has its own peculiarity but in most cases the level of uncertainty count for something so not very much in some cases a slightly higher average price is required to induce a given outlet if that average is the means of why the event an uncertain result then if the adventurers may reckon confidentially on a return that differs but little from that average to the average price therefore we must add a recompense for uncertainty if that is unusual grade though if we added insulin again rich we should be counting the greater part of that try over season 5 this discussion of breach of trade has again brought before us the fact that the value of a thing though it tends to equal is normal money cost of production does not coincide with it at any particular time save by accident curry observing this suggested that we should speak of value in relation to money cost of production in relation to cost of production the suggestion has however no significance so far as normal values are concerned for normal cost of production and normal cost of reproduction are convertible terms and no real trend is made by saying that the normal value of a thing tends to equal is normal money cost of reproduction instead of is normal money cost of production the former phrase is less simple than the later but means the same thing and no valid argument for the trend can be founded on the fact which may be readily admitted that there are some few cases in which the market value of a thing is nearer is cost of reproduction than the cost that was actually incurred in producing that particular thing the present price of an iron sea for instance make before the great recent improvement in the manufacturers of iron might diverge less from the cost of reproducing and is of producing another just like it by modern methods than from that which was actually incurred in producing it but the price of the old safe would be less than the cost of reproducing of the safe because the art of designing safe has improved as fast that of manufacturing iron and moreover still has display iron as the material of safe building it may still be urged that the price of the safe is equal to that of producing a safe which would be equal serviceable on the modern plan and by modern methods but that would not be the same thing as saying that the value of the safe is equal to its cost of reproduction and as a matter of fact when as often happens an unexpected circuit scarcity of safe causes freight to increase very rapidly those who have answers to ref the harvest of profitable trade will pay for a safe in sharing order of price much over much above that for which safe building firm would contracts to produce another equally good and deliver it sometime hence cost of reproduction asserts little direct influence on value safe when purchaser can conveniently wait for the productions of new supplies again there is no connection between cost of reproduction and price in the cases of forth in a beleaguered city of Kienin the supply of which has run sought in a favor stricken island of a beacher by rabble of a book that nobody care to read of an Alma club safe of obsolete pattern of fish when the market is glutted of fish when the market is nearly emptied of crack of a rash material that has gone out of fashion or of a house in this deserted meaning big village the reader unless already experienced in economic analysis is recommended to the next seven chapters and bus at once to chapter 15 which contain a brief summary of this book it is true that the four chapters on marginal cost in relation to values and especially chapter 8 and chapter 9 bear upon some difficulties with a latent in the phrase the net brothers of labor and that this phrase is used in book but the broad nation of it given their will surface provisionably for most purposes and in three cases connected with it may be best appreciated at a somewhat advanced state of economy