Principles of Political Economy (Malthus)/Book 1/Chapter 2/Section 2
The terms demand and supply are so familiar to the ear of every reader, and their application in single instances so fully understood, that in the slight use which has hitherto been made of them, it has not been thought necessary to interrupt the course of the reasoning by definitions and explanations. These terms, however, though in constant use, are by no means applied with precision. And before we proceed further, it may be advisable to clear this part of the ground as much as possible, that we may be certain of the footing on which we stand. This will appear to be the more necessary, as it must be allowed that of all the principles of political economy, there is none which bears so large a share in the phenomena which come under its consideration as the principle of supply and demand. It has been already stated, that exchangeable value is the relation of one object to some other or others in exchange. And when, by the introduction of a medium of exchange and measure of value, a distinction has been made between buyers and sellers, the demand for any sort of commodities may be defined to be, the will of persons to purchase them, combined with their general means of purchasing; and supply, the quantity of the commodities for sale, combined with the desire to sell them.* It is further evident, that when the use of the precious metals, as a medium of exchange and measure of value, has become general, and during those periods when their value is considered as remaining the same, the demand will be represented and measured by the sacrifice in money which the demanders are willing and able to make in order to satisfy their wants. In this state of things, the value of commodities in money or their prices are determined by the demand for them, compared with the supply of them. And this law appears to be so general, that probably not a single instance of a change of price can be found, which may not be satisfactorily traced to some previous change in the state of the demand or supply.
In examining the truth of this position, we must constantly bear in mind the terms in which it is expressed; and recollect, that when prices are said to be determined by demand and supply, it is not meant that they are determined either by the demand alone, or by the supply alone, but by their relation to each other. But how is this relation to be determined? It has sometimes been said, that demand is always equal to supply; because no supply of any commodity can take place for which there is not a demand, which will take off all that is offered. In one sense of the terms in which demand and supply have been used, this position may be granted. The actual extent of the demand, compared with the actual extent of the supply are always nearly equal to each other. If the supply be ever so small, the extent of the demand cannot be greater; and if the supply be ever so great, the extent of the demand will in most cases increase in proportion to the fall of price occasioned by the desire to sell, and the consumption will finally equal the production. It cannot, therefore, be in this sense that a change in the proportion of demand to supply takes place; because in this sense demand and supply always bear nearly the same relation to each other. And this uncertainty in the use of these terms, renders it an absolutely necessary preliminary in the present inquiry, clearly to ascertain what is the nature of that change in the relation of demand and supply on which the prices of commodities so entirely depend. Demand has been defined to be the will to purchase, combined with the means of purchasing.
The greater is the degree of this will, and of these means of purchasing when directed to any particular commodity wanted, the greater or the more intense may be said to be the demand for it. But, however great this will and these means may be among the demanders of a commodity, none of them will be disposed to give a high price for it, if they can obtain it at a low one; and as long as the means and competition of the sellers continue to bring the quantity wanted to market at a low price, the whole intensity of the demand will not show itself.
If a given number of commodities attainable by labour alone, were to become more difficult of acquisition, as they would evidently not be obtained unless by means of increased exertion, we might merely consider such increased exertion, if applied, as an evidence of a greater intensity of demand, or of a will and power to make a greater sacrifice in order to obtain them.
In the same manner, if while money is considered as of the same value, certain commodities, either from scarcity, or the greater cost of production become more difficult of acquisition, as they will certainly not be acquired except by those who are willing and able to sacrifice a greater amount of money in order to obtain them, such sacrifice, if made, must be considered as an evidence of greater intensity of demand.
In fact, it may be said, that the giving a greater price for a commodity, while the difficulty of obtaining money remains the same, necessarily implies a greater intensity of demand; and that the real question is, what are the causes which determine the increase or diminution of this intensity of demand, which shows itself in a rise or fall of prices.
It has been justly stated that the causes which tend to raise the price of any article estimated in some commodity named, and supposed, for short periods, not essentially to vary in the difficulty of its production, or the state of its supply compared with the demand, are, an increase in the number, wants, and means of the demanders, or a deficiency in the supply; and the causes which lower the price are a diminution in the number, wants, and means of the demanders, or an increased abundance in its supply.
Now the first class of these causes is obviously calculated to call forth the expression of a greater intensity of demand, and the other of a less.
If, for instance, a commodity which had been habitually demanded and consumed by a thousand purchasers, were suddenly to be wanted by two thousand, it is clear that before this increased extent of demand can be supplied, some must go without what they want; and it is scarcely possible to suppose that the intensity of individual demand should not exist in such a degree among a sufficient number of these two thousand demanders, as to take off the whole of the commodity produced at an increased price. At the same time, if we could suppose it possible, that the wills and means of the demanders, or the intensity of their demand would not admit of increase, it is quite certain that however the matter might be settled among the contending competitors, no rise of price could take place.*
In the same manner, if a commodity were to be diminished one half in quantity, it is scarcely possible to suppose that a sufficient number of the former demanders would not be both willing and able to take off the diminished quantity, at a higher price; but if they really would not or could not do this, the price could not rise.
On the other hand, if the permanent cost of producing the commodity were doubled, it is evident that such a quantity only could be permanently brought to market, as would supply the wants of those who were both able and willing to make a sacrifice for the attainment of their wishes, equal to double of what they did before. The quantity of the commodity which would be brought to market under these circumstances might be extremely different. It might be reduced to the supply of a single individual, or might remain precisely the same as before. If it were reduced to the supply of a single individual, it would be a proof that only one of all the former purchasers was both able and willing to make an effectual demand for it at the advanced price. If the supply remained the same, it would be a proof that all the purchasers were in this state, but that the expression of this intensity of demand had not before been rendered necessary on account of the facility with which the article had been previously produced, and the competition of the sellers. In the latter case there would be exactly the same quantity of the commodity supplied, and exactly the same effectual demand for it in regard to extent. But there would be a much greater intensity of demand called forth, the value brought to market to exchange for the commodity in question would have greatly increased; and this may be fairly said to be a most important change in the relation between the demand and the supply of the commodity. Without the increased intensity of demand, which in this case takes place, the commodity would cease to be produced, that is, the failure of the supply would be contingent upon the failure of the will or power to make a greater sacrifice for the object sought.*
Upon the same principles, if, owing to an unusual supply, a commodity were to become much more abundant compared with the former number of purchasers, this increased supply could not be all sold, unless the price were lowered. Each seller wishing to dispose of that part of the commodity which he possessed under the fear of its remaining upon his hands, would go on lowering it till he had effected his object; and though the wills and means of the old purchasers might remain undiminished, yet as the commodity could be obtained without the expression of the same intensity of demand as before, this demand would of course not then show itself.
A similar effect would obviously take place from the consumers of a commodity requiring a less quantity of it.
If instead of a temporary abundance of supply compared with the demand, the cost of producing any particular commodity were greatly diminished, the fall of price would in the same manner be occasioned by an increased abundance of supply, either actual or contingent. In almost all practical cases it would be an actual and permanent increase; because the competition of the sellers would lower the price, and it very rarely happens that a fall of price does not occasion an increased consumption. On the supposition however, of the very rare case that a definite quantity of the commodity only was required, whatever might be its price, it is obvious that from the competition of the producers, a greater quantity would be brought to market than could be consumed, till the price was reduced in proportion to the increased facility of production; and this temporary excess of supply would be always contingent upon the circumstance of the price being at any time higher than that which would return average profits. In this case of a fall of prices, as in the other of a rise of prices, the actual quantity of the commodity supplied and consumed may possibly, after a short struggle, be the same as before; yet it cannot be said that no change has taken place in the demand. It may indeed exist latently in the same degree, and the actual consumers of the commodity might be perfectly ready to give what they gave before rather than go without it; but such has been the alteration in the means of supply, compared with the former demand, that the competition of the producers renders the making of the same sacrifice no longer necessary to effect the supply required; and not being necessary, it is of course not made, and the price falls.
It is evidently, therefore, not merely the extent of actual demand, nor even the extent of actual demand compared with the extent of the actual supply, which raises prices, but such a change in the relation between demand and supply, as renders necessary the expression of a greater intensity of demand, or the offer of a greater value compared with the quantity supplied, in order either peaceably to divide an actual produce, or to prevent the future produce of the same kind from failing.
And in the same manner, it is not merely the extent of actual supply, nor the extent of the actual supply compared with the extent of the actual demand, (which are generally nearly equal) that lowers prices; but such a change in the relation of the supply compared with the demand as renders a fall of price necessary, in order to take off a temporary abundance, or to prevent a constant excess of supply contingent upon a diminution in the costs of production, without a proportionate diminution in the price of produce.
If the terms demand and supply be understood, and used in the way here described, there is no case of price, whether temporary or permanent, which they will not determine; and in every instance of bargain and sale, it will be perfectly correct to say, that the prices of commodities will depend upon the relation of the demand to the supply; or will vary as the demand (that is, the money ready to be offered) directly, and the supply inversely.
I wish it to be particularly observed, that in this discussion, I have not given a meaning to the terms demand and supply different from that in which they have been most frequently applied before. In the use which I have made of the words intense and intensity as applied to demand, my purpose has been to explain the meaning which has hitherto always been attached to the terms demand, when it is said to raise prices. Mr. Ricardo, in his chapter “On the influence of demand and supply on prices,” observes, that “the demand for a commodity cannot be said to increase, if no additional quantity of it be purchased or consumed.” But it is obvious, as I have before remarked, that it is not in the sense of mere extent of consumption that demand raises prices, because it is almost always when prices are the lowest, that the extent of demand and consumption is the greatest. This, therefore, cannot be the meaning hitherto attached to the term demand, when it is said to raise prices. Mr. Ricardo, however, subsequently quotes Lord Lauderdale’s statements respecting value, and allows them to be true, as applied to monopolized commodities, and to the market prices of all other commodities, for a limited period. He would allow, therefore, that a deficiency in the usual quantity of an article in a market would occasion a greater demand for it compared with the supply, and raise its price, although in this case less than usual of the article must be purchased by the consumers. Demand in this sense is obviously quite different from the sense in which Mr. Ricardo had before used the term. The one is a demand in regard to extent, the increase of which implies a greater quantity of the commodity purchased; the other is demand in regard to intensity, the increase of which implies the will and power to make a greater sacrifice in order to obtain the object wanted. It is in this latter sense, I think, that the term is most frequently applied; at any rate, it is in this latter sense alone that demand raises prices.* It is in the nature of things absolutely impossible that any demand, in regard to extent, should raise prices, unaccompanied by a will and power on the part of the demanders to make a greater sacrifice, in order to satisfy their wants. And my object is to shew that, whenever we talk of demand and supply as determining prices, whether market, or natural, the terms must always be understood in the sense in which Mr. Ricardo, and every other person, has hitherto understood them, when speaking of commodities bought and sold in a market.