On the influence of demand and supply on prices

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It is the cost of production that should ultimately regulate the price of commodities, and not, as has often been said, the relationship between supply and demand: the relationship between supply and demand can, in effect, temporarily affect the market value of the goods. a commodity, until it is supplied in greater or less abundance, according as the demand has increased or diminished; but this effect will only be of temporary duration.

David Ricardo

On the principles of political economy and taxation

On The Principles of Political Economy, and Taxation, by David Ricardo is part of the HackerNoon Books series. You can skip to any chapter in this book here. Chapter XXVIII: Of the influence of demand and supply on prices

CHAPTER XXVIII. ON THE INFLUENCE OF DEMAND AND SUPPLY ON PRICES.

It is the cost of production that should ultimately regulate the price of commodities, and not, as has often been said, the relationship between supply and demand: the relationship between supply and demand can, in effect, temporarily affect the market value of the goods. a commodity, until it is supplied in greater or less abundance, according as the demand has increased or diminished; but this effect will only be of temporary duration.

Lower the cost of producing the hats, and their price will eventually drop to their new natural price, though demand must be doubled, tripled, or quadrupled. Decrease human living costs, by lowering the natural price of food and clothing, by which life is maintained, and wages will eventually fall, although the demand for labor may rise very sharply.

The opinion that the price of commodities depends solely on the proportion of supply to demand, or demand to supply, has become almost an axiom in political economy, and has been the source of much error in this science. It is this opinion which has led Mr. Buchanan to maintain that wages are not influenced by a rise or fall in the price of commodities, but solely by the demand and supply of labor; and that a tax on the wages of labor would not raise wages, because it would not alter the proportion of the demand for labor to the supply.

The demand for a commodity cannot be said to increase if no more of it is bought or consumed; and yet, under such circumstances, its monetary value may increase.

Thus, if the value of silver were to fall, the price of each commodity would rise, because each of the competitors would be ready to spend more silver than before for its pure.hunt; but although its price has increased by 10 or 20%. if there were not more purchases than before, it would not, I believe, be admissible to say that the variation in the price of the commodity was caused by the increase in demand. Its natural price, its monetary cost of production, would really be altered by the altered value of money; and without any increase in demand, the price of the commodity would naturally adjust itself to this new value.

“We have seen,” says Mr. Say, “that the cost of production determines the lowest price at which things can fall: the price below which they cannot stay long, because production would then be either entirely stopped or diminished. . . Volume ii. p. 26.

He then says that the demand for gold having increased in a still greater proportion than the supply, since the discovery of the mines, “its price in commodities, instead of falling in the proportion of ten to one, fell only in the proportion of four. to one;” that is, instead of falling in proportion its natural price had fallen, fallen as supply exceeded demand. “The value of every commodity always increases in direct ratio to demand and inversely to supply.”

The same opinion is expressed by the Earl of Lauderdale.

“As regards the variations of value, of which everything of value is susceptible, if we could for a moment suppose that any substance whatever possesses an intrinsic and fixed value, so as to render a supposed quantity of it constantly, under all circumstances, of equal value, then the degree of value of all things, established by such a fixed standard, would vary according to the proportion between their quantity and their demand, and each commodity would naturally be subject to a variation in its value. from four different circumstances.

1. “It would be subject to an increase in its value, a decrease in its quantity.

2. “To a decrease in its value, from an increase in its quantity.

3. “It might suffer from an increase in its value, from the circumstance of increased demand.

4. “Its value could be diminished by a failed claim.

“As it will however become clear that no commodity can possess a fixed and intrinsic value, so as to qualify it for a measure of the value of other commodities, mankind is led to choose, as a practical measure of value, that which appears the least subject to any of these four sources of variation, which are the only causes of alteration in value.

“When, in everyday language, we express the value of any commodity whatsoever, it can vary at one time from what it is at another, as a consequence of eight different contingencies.

1. “Of the four circumstances above stated, relative to the commodity whose value we intend to express.

2. “Of the same four circumstances, in relation to the commodity, we have adopted as a measure of value.

This is true of monopolized commodities, and even of the market price of all other commodities for a limited period. If the demand for hats were to double, the price would increase immediately, but this increase would only be temporary, unless the cost of producing the hats, or their natural price, was high. If the natural price of bread were to fall by 50%. of a great discovery in the science of agriculture, the demand would not increase much, for no one would desire more than he would satisfy his needs, and as the demand would not increase, neither would the supply; for a commodity is not offered simply because it can be produced, but because it is demanded. So we have here a case where supply and demand have hardly changed, or if they have increased, they have increased in the same proportion; and yet the price of bread will have fallen by 50%. at a time also when the value of money had remained invariable.

The commodities which are monopolized, either by an individual or by a company, vary according to the law laid down by Lord Lauderdale: they fall as the sellers increase their quantity, and rise in proportion to the eagerness of the buyers to buy. their; their price does not necessarily bear any relation to their natural value: but the prices of commodities, which are subject to competition and whose quantity can be increased in a moderate measure, will ultimately depend, not on the state of demand and supply, but the increase or decrease in the cost of their production.

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Ricardo, David. 2010. On the Principles of Political Economy and Taxation. Urbana, IL: Project Gutenberg. Retrieved October 2022 from https://www.gutenberg.org/files/33310/33310-h/33310-h.htm

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