467 



DEMAND AND SUPPLY. 



DEMAND AND SUPPLY. 



438 



The sellers endeavour to obtain the highest price for their goods ; the 

 price rises with the eagerness of those who wish to buy, and the highest 

 bidders only secure the prizes. In the market, however, the compe- 

 tition of the buyers is not perceptible amongst themselves except 

 through the prices demanded. Their competition determines the 

 prices, but the sellers judge of its extent and regulate their demands 

 BO as to obtain the greatest possible advantage from it. 



Some commodities are positively necessary for the support of the 

 people, of which the supply may fail very short of the demand and be 

 incapable of increase. This is the case when there is a bad harvest in 

 a country which is excluded from a foreign supply by war or by fiscal 

 restrictions. Here the price rises in proportion to the deficiency of the 

 crops. The competition for food is universal. Some, indeed, may be 

 driven to the consumption of inferior articles of food, and others to a 

 diminished consumption ; but all must eat. The number of consumers 

 is not diminished, while the supply is reduced ; and the price must, 

 therefore, rise and continue high until a fresh supply can be obtained. 

 In a siege the competition is still greater : the prices of provisions 

 become enormous ; the rich alone can buy, the poor must starve or 

 plunder. 



A similar effect is produced if the supply, without being deficient, be 

 confined to the possession of a small number of persons, who limit it 

 to the consumers in order to secure higher prices. However abundant 

 corn might be in a besieged town, if one man were exclusively autho- 

 rised by law to sell it, it might rise to a famine price, unless the people 

 broke into the granaries, or the government interfered with the mono- 

 poly. Less in degree, but similar hi principle, is the effect upon prices 

 of every limitation of the market by fiscal restrictions. When any 

 sellers are excluded, the others are enabled to raise their prices. 



These are cases in which the supply cannot be increased to meet the 

 demand, or in which the supply is monopolised. But the greater 

 number of commodities may be increased in quantity, and the supply 

 of them is not artificially limited. The price of these also rises when 

 the demand exceeds the supply ; but the increased price raises the 

 profit of the producer and attracts the competition of others in the 

 market. Fresh capital and labour are applied to the production of 

 the profitable article, until the supply is accommodated to the demand, 

 or exceeds it. The prices gradually fall, and at length the profits are 

 reduced to the same level as the profits in other undertakings, or even 

 lower. The encouragement to further production is thus withdrawn, 

 and prices are adjusted so as to secure to the producers the ordinary 

 rate of profits, and no more. 



But sometimes the demand for a commodity is diminished, if the 

 supply fall short of it for any considerable time. There are various 

 articles useful and agreeable to mankind, but not essential to their 

 existence, which they are eager to enjoy as far as they can, but for 

 which they are not prepared to make great sacrifices. When the price 

 of an article of this description is raised by a deficient supply, con- 

 tinuing for some length of time, it is placed beyond the reach of many 

 persons, who learn to regard it with indifference. They would buy it 

 if it were cheap ; but as it is dear they go without it, or are satisfied 

 with a substitute. In this manner the number of consumers is 

 diminished. Others again, who will not be deprived of an accustomed 

 luxury, enjoy it more sparingly, and consume it in less quantities. But 

 so long as the supply is not increased, the price will continue high, 

 because the consumers who still purchase the article, notwithstanding 

 its price, keep up an effective demand equal to the whole supply ; 

 while there is still a dormant demand, only awaiting a reduction of 

 price to become effective. 



For the same reasons, a demand for articles is diminished when their 

 price is artificially raised by taxation. The demand is gradually con- 

 fined to a smaller number of persons, and many consume more 

 sparingly. [TAX; TAXATION.] 



In these various ways demand and supply become adjusted through 

 the medium of price, whenever the one exceeds the other. This is the 

 result of natural laws, the operation of which is of the highest value to 

 mankind. If the supply be incapable of increase, it economises con- 

 sumption ; if the supply can be increased, it encourages production. 

 In i-ither case it is of great benefit to the consumer. To revert, for a 

 at, to the example of a bad harvest in a country excluded from 

 all foreign supply. Suppose that prices did not rise, but remained 

 precisely the same as if the harvest had been abundant, what would be 

 the consequence? The whole population would consume as much 

 bread as usual, and use flour in every way that luxury points out, 

 unconscious of any scarcity. Farmers might even feed their cattle 

 with wheat. By reason of this improvidence, the whole of the corn 

 would be consumed before the next harvest, and the horrors of famine 

 would burst, without any warning, upon a people living as if they were 

 in the midst of plenty. This evil is prevented by a rise of prices, which 

 is a symptom of scarcity, just as pain is a symptom of disease. By 

 timely precaution the clanger is averted. A high price renders economy 

 and providence compulsory, and thus limits consumption. The supply, 

 therefore, instead of being exhausted before the next harvest, is spread 

 over the whole year. In the case of food, it is tme that such economy 

 is painful, and presses heavily upon the poor ; but this evil is a mercy 

 compared with famine. If no privation had been endured before scarcity 

 became alarming, none but rich men could buy a loaf ; for every one 

 who had a loaf to sell would be risking his own life if he sold it. 



These observations are also applicable in some measure to cases in 

 which prices are raised by the supply being confined to one or to a few 

 persons, who have contrived to buy up the whole or nearly the whole 

 of any commodity. But such exclusive possession (sometimes impro- 

 perly called a monopoly) cannot exist for any length of time in articles 

 of which the supply is capable of increase. The extreme case has been 

 put of a besieged town in which the whole supply of corn was monopo- 

 lised by one man. Under those circumstances, of course he would 

 demand a high price ; but unless his exclusive supply were upheld by 

 law, it does not follow that the inhabitants would suffer on that 

 account. A most provident consumption of food is absolutely neces- 

 sary for the defence of a town, and no organisation could distribute 

 provisions according to the wants of the people so well as a system of 

 purchase restrained by a high price. It must also be recollected that, 

 without any such exclusive possession, the fact of the siege alone must 

 raise prices by cutting off fresh supplies. If the siege continue, pro- 

 visions are more likely to last out by the instrumentality of prices than 

 by any other means. At the same time the sole possessor of the corn 

 would be restrained from keeping back the supply beyond the actual 

 necessity of the occasion by many considerations. He would know 

 that if a popular tumult arose, if the town were relieved, the siege 

 raised, a capitulation agreed to, or the place suddenly carried by 

 assault, the value of his exclusive property would be destroyed. His 

 own interest, therefore, is coincident with that of the people. It is 

 better for both that the supply should be meted out with parsimony ; 

 it is dangerous to both that it should be immoderately stinted. 



In circumstances less peculiar than these, very little evil can arise 

 from an exclusive possession of any commodity not protected directly 

 or indirectly by law. If the supply be capable of increase, and the 

 demand be sufficient to enable the owner to secure a high price, for 

 reasons already explained, the market would rapidly be supplied from 

 other quarters. If the supply cannot be increased, that fact alone 

 would raise the price ; and it is probable that the supply would not 

 have been so great without the extraordinary activity of the capitalist, 

 who had been able to secure for his country the whole accessible 

 supply to be collected from the markets of the world. 



A monopoly, properly so called, is of a totally different character ; 

 for however abundant the supply of an article may be, it may, never- 

 theless, be inaccessible to the consumer. [MONOPOLY.] Such mono- 

 polies were properly condemned so far back as the reign of James I. 

 (21 James I. c. 3), although vast monopolies are still indirectly 

 maintained by our fiscal laws. [TAX ; TAXATION.] The legislature 

 of this country, however, did not observe any distinction between a 

 legal monopoly and the great speculative enterprises of commerce, 

 miscalled monopolies ; and severe penalties were inflicted, both by the 

 common and statute laws, against offences called " badgering, fore- 

 stalling, regrating, and engrossing." The impolicy of such laws was 

 gradually perceived. If prices were occasionally raised by speculations 

 of this kind, yet the restraints upon commerce, which resulted from 

 these laws, were infinitely more injurious to the consumer. Many of 

 the statutes were therefore repealed by Act 12 Geo. III. c. 71 ; but the 

 common law, and all the statutes relating to the offences of forestalling, 

 regrating, and engrossing, were not erased from our commercial code 

 until the year 1844 (Act 7 & 8 Viet. c. 24). 



When prices are high by reason of the demand exceeding the supply, 

 it is by no means necessary that the profits of those who sell the dear 

 commodities should always be greater than the profits in other branches 

 of trade. It must always be recollected, that where scarcity is the 

 cause of high price, the sellers who demand it have the less to sell. 

 Where scarcity is not the cause, but the demand is great because the 

 supply, notwithstanding the exertions of the producers, cannot keep 

 pace with it, the profits are undoubtedly greater than usual, until the 

 supply has been increased. 



II. It is now time to consider the effects of a supply exceeding the 

 demand ; and this division of the inquiry will require less elucidation, 

 as the effects of such a condition of the market may be stated to be 

 the very reverse of those which we have just been examining. When 

 there is more of a commodity than people are prepared to buy, its 

 price must fall. Its sellers must offer it for sale at the price at which 

 they can induce people to purchase. All is now in favour of con- 

 sumers. They are no longer bidding against each other : but the 

 sellers are competing among themselves to get rid of their goods. The 

 price falls generally in proportion to the excess of the quantity, but 

 this result is very much qualified by the nature of the article. If 

 there be an excess of supply in perishable goods, there is nothing to 

 prevent the natural fall of prices. When fish is unusually abundant, 

 it must be cheap, or a great part of it will be destroyed : it must be 

 eaten at once, or not at all ; and to induce people to eat it, it must be 

 offered to them at a low price. But with articles which may be held 

 back, in expectation of higher prices, their value may be partially 

 sustained. Production may be reduced, and the stock gradually 

 brought into the market, until the supply has been equalised with the 

 demand ; and wherever the article is such as to admit of voluntary 

 increase or diminution, the natural result of an excessive supply is 

 to reduce production, until the balance of supply and demand has 

 been restored. This mutual adjustment is in perpetual operation, and 

 is ordinarily effected with such precision, that it may be said, without 

 exaggeration, that a largo city ia supplied exactly with everything its 



