Principles of Economics
BOOK V, CHAPTER XII
EQUILIBRIUM OF NORMAL DEMAND AND SUPPLY, CONTINUED, WITH REFERENCE TO THE LAW OF INCREASING RETURN.
§ 1. We may
Principles of Economics
BOOK V, CHAPTER XII
EQUILIBRIUM OF NORMAL DEMAND AND SUPPLY, CONTINUED, WITH REFERENCE TO THE LAW OF INCREASING RETURN.
§ 1. We may now continue the study begun in chapters III. and V.; and examine some difficulties connected with the relations of demand and supply as regards commodities the production of which tends to increasing return.
We have noted that this tendency seldom shows itself immediately on an increase of demand. To take an example, the first effect of a sudden fashion for watch-shaped aneroids would be a temporary rise of price, in spite of the fact that they contain no material of which there is but a scanty stock. For highly paid labour, that had no special training for the work, would have to be drawn in from other trades; a good deal of effort would be wasted, and for a time the real and the money cost of production would be increased.
But yet, if the fashion lasted a considerable time, then even independently of any new invention, the cost of making aneroids would fall gradually. For specialized skill in abundance would be trained, and properly graduated to the various work to be done. With a large use of the method of interchangeable parts, specialized machinery would do better and more cheaply much of the work that is now done by hand; and thus a continued increase in the annual output of watch-shaped aneroids would lower their price very much.
Here there is to be noted an important difference between demand and supply. A fall in the price, at which a commodity is offered, acts on demand always in one direction. The amount of the commodity demanded may increase much or little according as the demand is elastic or inelastic: and a long or short time may be required for developing the new and extended uses of the commodity, which are rendered possible by the fall in price*108. But—at all events if exceptional cases in which a thing is driven out of fashion by a fall in its price be neglected—the influence of price on demand is similar in character for all commodities: and, further, those demands which show high elasticity in the long run, show a high elasticity almost at once; so that, subject to a few exceptions, we may speak of the demand for a commodity as being of high or low elasticity without specifying how far we are looking ahead.
But there are no such simple rules with regard to supply. An increase in the price offered by purchasers does indeed always increase supply: and thus it is true that, if we have regard to short periods only, and especially to the transactions of a dealer's market, there is an "elasticity of supply" which corresponds closely to elasticity of demand. That is to say, a given rise in price will cause a great or a small increase in the offers which sellers accept, according as they have large or small reserves in the background, and as they have formed low or high estimates of the level of prices at the next market: and this rule applies nearly in the same way to things which in the long run have a tendency to diminishing return as to those which have a tendency to increasing return. In fact if the large plant needed in a branch of manufacture is fully occupied, and cannot be rapidly increased, an increase in the price offered for its products may have no perceptible effect in increasing the output for some considerable time: while a similar increase in the demand for a hand-made commodity might call forth quickly a great increase in supply, though in the long run its supply conformed to that of constant return or even of diminishing return.
In the more fundamental questions which relate to long periods, the matter is even more complex. For the ultimate output corresponding to an unconditional demand at even current prices would be theoretically infinite; and therefore the elasticity of supply of a commodity which conforms to the law of Increasing Return, or even to that of Constant Return, is theoretically infinite for long periods*109.
§ 2. The next point to be observed is that this tendency to a fall in the price of a commodity as a result of a gradual development of the industry by which it is made,