LAWS OF SUPPLY AND DEMAND 89 



supply at a higher price than cost price as above defined, makers 

 will be tempted to produce more, until by the action of the 

 second law the demand and supply at cost price become equal. 

 From these considerations may be deduced the third law of 

 demand and supply, which really does enable us to estimate 

 the probable price of any article, as well as the probable quan- 

 tity manufactured, and which may be stated as follows : 



PROP. 3. In the long run, the price of the manufactured 

 article is chiefly determined by the cost of its production, and the 

 quantity manufactured is chiefly determined by the demand at 

 tit at price. 



The average height of the supply curve, over a number of 

 years, depends on the cost of production alone ; but at any 

 moment its position above or below that average depends on the 

 estimate formed by producers whether the actual demand curve 

 is above or below the average, and whether the future demand 

 curve is likely to rise above or fall below the actual demand 

 curve. This uncertain estimate varying day by day according 

 to transactions in the market and the dispositions of holders, 

 determines the departures of the supply curve from the average 

 fixed by cost of production. These departures alone (which 

 may be considerable) are the subject-matter of the first and 

 second laws of demand and supply. It is to be observed that 

 this case has one point in common with that where the quantity 

 of an article is limited viz. the price in the long ran is fixed 

 by the holders ; the number of transactions or quantity sold, by 

 the buyers. For when we say the average price depends on 

 the cost of production, including a profit to producers, these 

 producers are free to choose what profit they will be content with 

 as a body. This profit may vary, and does vary immensely, in 

 different countries, and at different times. Competition at any 

 one time prevents wide divergence from the average rate of 

 profit expected by manufacturers : but what profit is sufficient 

 to induce a man to produce is none the less a mere matter of 

 opinion. Still, over a long range of years the general opinion 

 on this point in a given country can be ascertained, and thus, 

 by the third law, then and there the probable price of an article 

 can be calculated. 



The graphic representation of the third law is very similar 



