Effective demand

“ A major function of our competitive free enterprise economy is to satisfy consumer demand. The effective demand of consumers is what keeps producers in the business of supplying goods and services and is vital to keeping the wheels of industry turning. ”

“ Individual deliveries, in contrast with Distribution into the two basic categories, Wages and Rent, consist in the delivery of Wealth to individuals in proportion to the effective demands of each. Their demands are limitless, for when satisfied with quantity they naturally demand quality. But there is a limit to all effective demands. The limitation on the one hand is the producer’s ability to produce, and on the other the consumer’s ability to obtain in Trade. Ability to produce depends in high degree at any time upon the general productive knowledge of the time. ”

“ Population regulates itself by the funds which are to employ it, and therefore always increases or diminishes with the increase or diminution of capital. Every reduction of capital is therefore necessarily followed by a less effective demand for corn, by a fall of price, and by diminished cultivation. ”

“ Business skill must be added to better farming methods. The farm problem is also a business question.
3. The moment, however, we begin to discuss price we enter a realm where economic factors dominate. We commonly say demand and supply determine price; but effective demand and effective supply are the resultants of many forces. The supply of a given product is influenced by the cost of growing in various locations, by cost of transportation, by competition of other countries. The demand is influenced by the state of wages, by standards of living, by effectiveness of distribution. ”

“ The whole quantity of industry annually employed in order to bring any commodity to market, naturally suits itself in this manner to the effectual demand. It naturally aims at bringing always that precise quantity thither which may be sufficient to supply, and no more than supply, that demand. ”

“ But we should never forget that there is no service or commodity produced by man, however essential it may seem, the demand for or the supply of which might not be reduced to nothing, if the price were sufficiently raised on the one hand, or lowered on the other. ”

“ They consist also of what may be called the policy of the whole business—the quick comprehension of the fluctuating wants of the consumer, the extent to which these may be led, the extent to which they must be followed, the constant power of adjusting the supply of a commodity to the demand. ”

“ The principle, that value is proportional to cost of production, being consequently inapplicable, we must revert to a principle anterior to that of cost of production, and from which this last flows as a consequence,—namely, the principle of demand and supply. ”

“ Those manufactures, therefore, that are produced upon a large scale are the sort of manufactures in which we may expect the greatest reduction in cost; in which, therefore, the fall in price, with the progress of society, will be most marked. But the manufactures which are produced upon the largest scale are those for which there exists the largest demand—that is to say, are those which enter most extensively into the consumption of the great mass of people. They are [pg 484] also, I may add, those in which a fall in price is apt to stimulate a great increase of demand. ”

“ Demand and supply, as we have seen, are dependent upon price; but equally clearly they are dependent upon other things as well. Demand depends upon the needs, tastes and habits of the people, as well as upon the length of their purse; supply depends upon such things as the cost of production in the case of commodities. None of these things are constant factors, all of them are liable to change, and it may well happen that we shall want to consider in some concrete problem the probable consequences of such a change. ”

“ Let us sum up in a general form our conclusions as to the way in which changes in the supply or demand of a commodity react upon the demand or supply of the other things with which it is jointly demanded or supplied. Everything turns, as we have seen, on the possibility of variation in the proportions in which the things are used or produced together ”

“ If there be no free competition between industries, then the value of those commodities which has been said, in the above classification, to depend on cost of production, will be governed by the law of Reciprocal Demand. ”

“ The Value of these Commodities confirm, in the long run, to their Cost of Production through the operation of Demand and Supply. The latent influence by which the values of things are made to conform in the long run to the cost of production is the variation that would otherwise take place in the supply of the commodity. ”

“ Here, in the high prices representing demand and the need for some reinvestment of interest representing supply, we have two of the chief factors that are supposed to be necessary to a phase of business enterprise. ”

“ But cost of production is the chief factor which, in the case of commodities, ultimately determines the conditions of supply. Utility, similarly, is the chief factor which ultimately determines the conditions of demand. Must not then the symmetrical relations between demand and supply be reflected in a corresponding symmetry between the utility and the costs which underlie them? Demand springs obviously from utility; the only motive for buying anything is that it will serve some real or fancied use. Can we then accord to demand so dignified and to utility so subordinate a place? ”

“ Under ordinary circumstances, the high price occasioned by deficiency in the supply of any article in general demand, operating as a premium upon increased production, has a direct and natural tendency to remedy its own evils. ”

“ When, therefore, two or more commodities have a joint cost of production, their natural values relatively to each other are those which will create a demand for each, in the ratio of the quantities in which they are sent forth by the productive process. ”

“ Seeing that production is limited by consumption, what rule must be followed in distributing the results of production to be consumed in order to develop consumption to the highest possible point, and thereby in turn to create the greatest possible demand for production. ”

“ The nature of demand is to encourage industry; and when it is regularly made, the effect of it is, that the supply for the most part is found to be in proportion to it, and then the demand is commonly simple. It becomes compound from other circumstances. As when it is irregular, that is, unexpected, or when the usual supply fails; the consequence of which is, that the provision made for the demand, falling short of the just proportion, occasions a competition among the buyers, and raises the current, that is, the ordinary prices. From this it is, that we commonly say, demand raises prices. ”

“ There is a demand for a certain quantity of the commodity at its natural or cost value, and to that the supply in the long run endeavours to conform. When at any time it fails of so conforming, it is either from miscalculation, or from a change in some of the elements of the problem: either in the natural value, that is, in the cost of production ”

“ Production in advance of actual demand indicates nothing more than that the producers are confident that such demand exists in embryo. If they err, the Products have no market; if they have guessed aright, the volume of Products increases to meet the demand. By and large, then, demand for Consumption regulates Production; or, in Economic phrasing, supply in Production is determined by demand for Consumption.
Being continuous, the human demand for Artificial Objects to consume stimulates continuous Production; being progressive, it promotes improvement in Productive methods and accomplishments. ”

“ But, secondly: the modern economist, ignoring intrinsic value, and accepting the popular estimate of things as the only ground of his science, has imagined himself to have ascertained the constant laws regulating the relation of this popular demand to its supply; or, at least, to have proved that demand and supply were connected by heavenly balance, over which human foresight had no power. ”

“ In the only remaining and by far most comprehensive class of cases, in which the Supply of Commodities and Services and Credits can be readily and indefinitely increased to meet enhanced Demand, and easily withdrawn from market and stored when Demand declines, each rise and fall of market-rate tends to be speedily checked through the mere action of Supply ”

“ The price of the one species of commodities varies only with the variations in the demand; that of the other varies not only with the variations in the demand, but with the much greater, and more frequent, variations in the quantity of what is brought to market, in order to supply that demand. ”

“ Whether we were dealing with the price of an ordinary commodity, with joint products, land or capital, we came across relationships which seemed altogether more fundamental than our present industrial system ”

“ And so, on the other hand, an increase of the supply which lowers the price is wont, in the case of pleasures capable of a wide extension, such as are ministered to by fine roots, vegetables, etc., to produce an increase of the demand, and this operates to arrest the falling price. ”

“ In order to apply this principle, with any advantage, to the solution of the question which now occupies us, the principle itself, and the idea attached to the term demand, must be conceived with a precision, which the loose manner in which the words are used generally prevents.
It is well known that the quantity of any commodity which can be disposed of, varies with the price. The higher the price, the fewer will be the purchasers, and the smaller the quantity sold. The lower the price, the greater will in general be the number of purchasers, and the greater the quantity disposed of. ”

“ Or, on the contrary, the competition may cease before the value has risen in even the proportion of the deficiency. A rise, short of one-third, may place the article beyond the means, or beyond the inclinations, of purchasers to the full amount. At what point, then, will the rise be arrested? At the point, whatever it be, which equalizes the demand and the supply: at the price which cuts off the extra third from the demand, or brings forward additional sellers sufficient to supply it. ”

“ Such enhancements of the market price are evidently the effect of natural causes which may hinder the effectual demand from ever being fully supplied, and which may continue, therefore, to operate forever. ”

“ Malthus then proceeds to shew, that demand and high price will as effectually encourage the production of raw produce, as the demand and high price of any other commodity will encourage its production. ”

“ All economists recognize the fact that the immediate determiner of value is the relation between supply and demand. These terms in their economic sense mean something more than mere desire and mere quantity. Supply means the amount offered in exchange, and demand means not only a desire, but a desire coupled with the ability and willingness to give other commodities in exchange for the one wanted. ”

“ We shall do well to cultivate a lively sense of this symmetry, for it will frequently save us from ignoring factors which have a vital bearing on the problems we are considering. We should never leave an important feature of demand without turning to see whether it has a counterpart on the supply side, though indeed we may not always find one. In the last chapter we examined the relation between utility and price, and found that the true relation was between the price and what we termed the marginal utility. Corresponding to utility on the demand side is cost of production on the supply side. ”

“ A business may decide deliberately to sell part of its output below cost, because, for instance, this will serve as an advertisement, bring it connections, and enable it to obtain a larger profit at a later date, or immediately on other portions of its sales. ”

“ In the daily avocations of the world, whether in commerce, in science, in literature, or in surgery, the demand is exacting, and the new discoveries in all of these branches call forth on all sides fresh incentives and caterers for the supply. The problem in all classes or professions is now how to adjust the supply, already over-abundant, to the demand. The professions are over-crowded, and, though the prizes may be great and few, the blanks are many and the list of failures is long. ”

“ Manufacturing industry increases its produce in proportion to the demand, and the price falls; but the produce of land cannot be so increased; and a high price is still necessary to prevent the consumption from exceeding the supply. ”

“ And yet all these so diverse factors of influence evolve and harmonize under and, at the same time, demonstrate the existence of a law more immutable than any other in economic science—namely, that when production increases in excess of current market demand, even to the extent of an inconsiderable fraction, or is cheapened through any agency, prices will decline ”

“ It is always a difficult problem to solve, especially where the field is very large, and the producers many, and constantly increasing. In attempting to meet it, the first question to be answered is, does the present supply greatly overreach the present demand? ”

“ The internal actions constituting social functions, exemplify the general principle no less clearly. Supply and demand are continually being adjusted throughout all industrial processes; and this equilibration is interpretable in the same way as preceding ones. The production and distribution of a commodity, is the expression of a certain aggregate of forces causing special kinds and amounts of motion. The price of this commodity, is the measure of a certain other aggregate of forces expended by the labourer who purchases it, in other kinds and amounts of motion. ”