48 VALUE of demand. It would only be so if the seller had simply to compare the relative advantages of exchanging his com modity and of retaining it for his own use, without any further reference to the conditions of, or the motives for, production. In most commodities, however, the determin ing influence is not the comparative utility of consumption by the owner on the one hand or of the consumption of something else obtained by exchange on the other, but it is rather a comparison of the trouble of producing with the advantage of selling the article when produced. Of course, if we are considering finished products in any market the case is more simple; but even here the question of the relative advantages of present sale and reservation for a future market or distant place must be determined, and then the element of cost of production will again be brought back. Before considering the relation of cost of production to supply, it will be convenient to combine the laws of supply and demand, taking the former in its simplest aspect, and to state the general law of supply and demand as govern ing value. Excluding the simple case of the barter of two commodities of which the rate of exchange will be determined as explained above in reference to final utility, and meaning by demand the quantity demanded in a market at a certain price, and by supply the quantity there and then offered at a certain price, the general law Equation may be stated thus : In any market the price of any article between w i}| b e so adjusted that the quantity demanded will ex- Lemand ac ^y 6 q Ua i the quantity offered at that price. The force supply, by which the adjustment is made is, in general, competi tion. Thus, if the price were above the point indicated by the law, there would be a lessened demand and the competition of sellers would tend to lower the price. Con versely, if the price were lower the competition caused by the increased demand would tend to raise it. The law as thus stated corresponds to what Mill calls the equation between demand and supply. He was induced to adopt this phrase in place of the more popular expression, the ratio of demand to supply, on the ground of its greater accuracy. And, if the term ratio is to be taken strictly, no doubt Mill s criticism is perfectly just. At the same time the equation must be stated very carefully to avoid falling into the truism suggested by Cairnes, namely, that in any market the quantity bought at any price is equal to the quantity sold at that price. The point is that in accordance with the general principles of supply and de mand the quantities offered and demanded vary with the price. And, however inaccurate the literal use of the term ratio may be, it has the advantage of suggesting a change of price according to changes in demand and supply. Mono- It may be useful at this point to consider the principles Ply by which monopoly values are regulated. The simplest case is when one individual possesses the whole stock and the cost of production is so small that it may be neglected. Take the case, for example, of some natural well having a unique character for the mineral waters it supplies. The monopolist will, in the first place, have to discover the law of demand for his article. If he fixes a very high price, he may only occasionally sell a pint to a king or a millionaire, whilst, if he fixes a very low price, he may sell to every peasant and yet get a very poor return. He will, in fact, have to work out a problem in mathematics, and must so adjust his price that the quantity sold multiplied by the price per unit will be a maximum. The same kind of difficulty is found in the case in which the expenses of production, although considerable, are practically fixed or only increase slightly in proportion to the quantity fur nished. The minimum price will be given by the expenses of production, whilst the actual price will tend to be such as to yield the maximum profit. Take, for example, the values. case of a steamer which has a practical monopoly and is not controlled by Government. The owner will not send out the steamer at all unless the passengers and cargo pay the expenses ; but, if there is a great demand, he will raise the price so as to secure a maximum profit. In general, however, any increase in the quantity of the article pro duced (or the service rendered) will be accompanied by an increase in the necessary outlays, and this increase may be greater or less per unit. In these cases the calcu lation of the maximum profit is a matter of great difficulty. Take, for example, the case of a railway which has a monopoly in a certain tract of country. The manager may aim at keeping down expenses and charging high rates, being contented with a moderate traffic ; or he may lower his charges and incur additional expense to increase the gross income. It is worthy of remark that in many cases the monopolist has a choice of two methods which give practically equally good results, one starting with low and the other with high prices. But it is clear that the mass of the general public or the great body of consumers have an interest in low prices being adopted, whilst, on the other hand, the tendency is usually for the monopolist to charge higher prices than are really profitable in a maximum degree. The simplicity of the method of high prices is always attractive and often deceptive. Accord ingly, even on these very general grounds, the interference of Government with monopolies may be defended as being in the interests of the public and not against the interests of the monopolists. The case of the parliamentary third- class tickets furnishes an instructive example. At first the railways made their parliamentary trains as slow and inconvenient as possible, whereas now there is hardly a train which does not carry passengers at parliamentary rates without compulsion. In a similar way many cases of Governmental interference with landowners may be justified, for very often there is a tacit combination on the part of a few great landowners to act on certain customs. 1 As a rule, however, in modern commercial Competi- countries monopolies are an exception. Any one, for ex- tion ample, can prosecute any trade or manufacture if he can values - provide the requisite skill, labour, and capital, and even as regards land, at any rate in the greater part of England and Scotland, there is from the point of view of cultiva tion no real monopoly. But, when competition arises, exceptional profit ceases, and thus a new principle for determining values conies into play. If the producer of any article is obtaining more than the usual rate of profit, he at once provokes competition, and thus even the dread of this possible competition may keep down prices. This is often expressed by saying that the potential supply affects prices almost as much as the actual supply. It thus be comes obvious that, as regards freely produced commodities the production of which may be extended indefinitely at the same or at a decreasing cost, the value tends to con form to the minimum cost of production, and that any other value is consequently unstable. It will be observed, how ever, that cost of production only determines values by operating through the actual or potential supply, and thus that the law of demand and supply is fundamental. Once a thing is made, the actual cost of production has no influ ence on its value, except as indicating the conditions of future possible supply. At this point it becomes necessary to analyse and explain Cost of the nature of cost of production. In the last resort it will produc- be found that nothing can be produced without labour, tlon- and in a modern society capital must be added. Thus the component elements of production are labour and capital 1 The general theory of monopolies is admirably treated by the French mathematician and economist Cournot, Revue Sommairc des
Doctrines ftconomiques, Paris, 1877.