Market equilibrium

“ Some say: we have produced too much, and others: we have not produced enough. “There will be no equilibrium,” say the former, “no peace and no prosperity until we consume the entire commodity surplus which remains unsold on the market, until we organise production for the future in accordance with the buyers’ demand.”—“There will be a new equilibrium,” say the latter, “if only we double our efforts to accumulate as well as to produce. It is a mistake to believe that there is a glut on the market; no more than half our warehouses are full ”

“ The price of labour, at the moment when demand and supply are in equilibrium, is its natural price, determined independently of the relation of demand and supply. And how this price is determined, is just the question. Or a larger period of oscillations in the market-price is taken, e.g., a year, and they are found to cancel one the other, leaving a mean average quantity, a relatively constant magnitude. ”

“ Phenomena of Markets.—Bagehot said of the money market that it is “often very dull and sometimes extremely excited.” This classical description of the market for “money” applies to a large extent to all markets.
Every market is at every moment tending to an equilibrium between the quantity of commodities offered and that of commodities desired; supposing equilibrium to have Tendency to Equilibrium. been attained in a given market, and that for some appreciable period it is not disturbed, the price for the commodity dealt in, in the market, will remain practically unchanged during that period. ”

“ It may be noticed, too, that sales of "rights," of puts and calls and straddles, and other contract rights, are regular factors in the organized exchanges. Wherever profits are to be made by leveling values as between different places or different times, speculation arises, and, with dynamic change, this means everywhere, in every business, and all the time! The shifting of labor and capital from industry to industry, leveling returns to capital and labor, involves an enormous amount of trading that would not occur in a "normal equilibrium." Much of this the Stock Exchange does. ”

“ If production exceeds, by even a very small percentage, what is required to meet every current demand for consumption, the price which the surplus will command in the open market will govern and control the price of the whole; and if it can not be sold at all, or with difficulty, an intense competition on the part of the owners of accumulated stocks to sell will be engendered, with a great reduction or annihilation of all profit. ”

“ But when good roads are made, and there is a rapid diffusion of 468printed or written intelligence, and still more when railways and telegraphs come into existence—when the periodical fairs of early days lapse into weekly markets, and these into daily markets; there is gradually produced a better balance of production and consumption. Extra demand is much more quickly followed by augmented supply; and the rapid oscillations of price within narrow limits on either side of a comparatively uniform mean, indicate a near approach to equilibrium. ”

“ Through miscalculation, too much or too little of a commodity is at times offered on the market, and it departs from its natural price. If too little is offered, profits will be too high, and capital will rush to the production of the commodity in order to gain the unusual profits, until competition forces them down to the usual rate, or, very likely, below it, when capital will be withdrawn from the production of said commodity. ”

“ The anomalous state of the Money Market proceeds, we believe, from a redundancy, not of mere paper, but of capital which cannot find investment, superinduced by stagnation of trade, and the want of commercial enterprise, occasioned by the restrictive nature of our duties on imports.—Morning Chronicle.
The accounts from the United States mention that the greatest activity prevails among the manufacturers in their purchases of the raw material for the year's consumption. ”

“ But whatever may be the source of the difference in price levels, equilibrium will eventually be restored through an international or interlocal redistribution of money and goods brought about by international and interlocal trade. Other elements in the equation of exchange than money and commodities cannot be transported from one place to another. ”

“ While thus ruling the oscillations of value, they themselves obey a superior force, which makes value gravitate towards Cost of Production, and which would settle it and keep it there, if fresh disturbing influences were not continually arising to make it again deviate. To pursue the same strain of metaphor, demand and supply always rush to an equilibrium, but the condition of stable equilibrium is when things exchange for each other according to their cost of production, or, in the expression we have used, when things are at their Natural Value. ”

“ The flow of money out of a country causes money to tighten, interest rates on short loans in the large cities to stiffen, and prices slightly to fall. When prices fall, imports decline, as the country is not so good a place to sell in; when prices rise, imports increase, as it is a better place to sell in. As the opposite effect is produced on exports, there occurs immediately a change in the quantity of money which continues until the national credits and debits balance and for a brief time remain in equilibrium. ”

“ They reveal that the equilibrium is established and maintained by the agency of changes in price, and they enable us to lay it down as perhaps the most important thing that can be said about the price of anything that it will tend to be such as will equate demand and supply. ”

“ To produce this effect, it is by no means requisite that the prices of all commodities should rise or fall simultaneously. A rise or a fall in the prices of a number of leading articles, is sufficient in the one case to increase, in the other to diminish, the sum of the prices of all commodities, and, therefore, to put more or less money in circulation. Whether the change in the price correspond to an actual change of value in the commodities, or whether it be the result of mere fluctuations in market prices, the effect on the quantity of the medium of circulation remains the same. ”

“ A sharper Demand carries up the market-rate, and a higher market-rate commonly [56] acts upon Supply to enlarge it, and an increased Supply too checks the rise of market-rate. Per contra, a slacker Demand lowers market-rates, and lowered rates often lessen the Supply by the action of holders and speculators,—holders withdrawing their stock for a better market, and speculators buying now when the article is cheap to store away until it shall be dearer. ”

“ Prices fall, production is checked, and a period of depression ensues. Gradually, however, the slackened rate of production allows the accumulated stocks to be cleared, perhaps below cost price, perhaps by waiting until demand grows up to supply. When this excess of demand over supply has once again become patent, business recovers. Depression yields to prosperity, competitors again vie with each other to increase their shares in the output, after a few years the market is glutted again, and a new crisis comes, to be followed once more by depression. ”

“ On the other hand, the same principle seems to fly to the assistance of trade, when the balance becomes unfavourable, as it virtually diminishes to strangers the price of all our commodities, by raising in our market the value of that commodity, (bullion) which they must give as the price of what they buy. ”

“ 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 ”

“ Similiarly if we wish to represent a change in the conditions of supply, such as might result, in the case of a commodity, from a tax imposed on its production, we must draw a new supply curve, ss', which in the case supposed, must lie everywhere above the old supply curve. On the other hand, the decrease or increase in demand or supply, resulting from a change in price, is represented simply by a shifting of the equilibrium from one point to another on the same curve. ”

“ With every fluctuation in the quantity and value of money, the prices of commodities naturally vary. They vary also, as we have already shewn, from the alteration in the proportion of supply to demand, although there should not be either greater facility or difficulty of production. When the market prices of goods fall from an abundant supply, from a diminished demand, or from a rise in the value of money, a manufacturer naturally accumulates an unusual quantity of finished goods, being unwilling to sell them at very depressed prices. ”

“ Where there are a large number of competitors the prices of the commodities supplied by them are leveled down until they reach a point where they will afford only a reasonable margin of profit, and beyond which they will cease to be profitable, and will therefore cease to be supplied until the equilibrium is again established. ”

“ It suffices to say that if supply and demand equilibrate each other, the market prices of commodities will correspond with their natural prices, that is to say, with, their values, as determined by the respective quantities of labour required for their production. But supply and demand must constantly tend to equilibrate each other, although they do so only by compensating one fluctuation by another, a rise by a fall, and vice versa. ”

“ As neither of these scales are sufficient for ascertaining a balance of trade; as such a balance, if obtained in money, could not be lasting, on account of the acuteness of money in search of its equilibrium; as a balance in commodities must be consumed or re-exported to procure other articles of consumption; and as even corn is subject to these laws, it follows that a balance of trade, estimated by either of these scales, is either an idea wholly chimerical, or exposed to perpetual fluctuations. ”

“ Normal equilibrium, however, depends on the slow working of changes in the rates of production and consumption, and would be measured in years. The normal equilibrium, if once established, is permanent so long as the conditions of production and consumption do not change. Slight alterations of these conditions—the exhaustion of mines, the discovery of new leads, etc.—will cause slight variations in the proportions of gold and silver money, that is, in the position of the film f. ”

“ The result will evidently be an increase of "inflow" into the bullion reservoir, and from that into the currency reservoir, a consequent gradual filling up of both, and therefore a decrease in the purchasing power of money. This process will be checked finally by the increase in consumption. And when production and consumption become equal, an equilibrium will be established. An exhaustion of gold mines obviously operates in exactly the reverse manner. ”

“ Each must compete with his fellows in the sale of his wares and the purchase of his articles of livelihood. Because of the competition of sellers the wages of labour, the profits of capital, and the prices of goods cannot be forced to untoward heights. Because of the competition of buyers they cannot be driven too low. The equilibrium of this double competitive process assures to each a return which represents the just value of the service, the property right, or the good. Prices, by moving up and down in response to changing conditions, stimulate and retard consumption and production. ”

“ Now, as I understand supply and demand in the market, they are not dead-weights of matter, like a rock crushing my finger; they are forces like the gravitation controlling the rock, and which I must recognize if I would keep my finger whole and escape mental distress. These forces affect laborers and capitalists, producers and consumers alike, and they are the strongest influence in fixing market-prices. In fact, we may consider them the only forces present and active when the selling price is fixed. All other forces must have been transmuted before price can be fixed. ”

“ Whenever the demand for their wares increases, each competitor tries to engross a larger portion of the market. "Inevitably, therefore, all the producers together tend to overshoot the demand and to glut the market for a time. This is a result not of wild speculation nor of miscalculation [Pg 646] of the total demand; it must be a normal incident wherever competition has a place at all." Such activity among producers constitutes the period of prosperity. But sooner or later the glutting of the market becomes apparent, and then the crisis comes, because the goods cannot all be sold at a profit. ”

“ What, then, are the lines of business in which selling prices cannot be raised sufficiently to prevent a reduction of profits? There are certain lines in which selling prices are stereotyped by law, by public commissions, by contracts of long term, by custom, or by business policy, and in which no advance, or but meagre advances can be made. There are other lines in which prices are always subject to the incalculable chances of the harvests, and in which the market value of all accumulated stocks of materials and finished goods wavers with the crop reports. ”