This section is from the "Economics In Two Volumes: Volume I. Economic Principles" book, by Frank A. Fetter. Also available from Amazon: Economic
§ 1. Buyers' composite valuation curve. § 2. Sellers' composite valuation curve. § 3. Price the resultant of demand and supply. § 4. The market as a two-sided auction. § 5. Supply and demand coordinate in price-determination. § 6. Price in a permanent market. § 7. Effect of the market upon valuations. § 8. The point of price-adjustment. § 9. Social factors in individual valuations. § 10. Objective conditions to be studied.
§ 1. Buyers' composite valuation curve. We have now to examine the process by which market-price is determined where two groups of bidders are present. This fulfils the conditions of a complete market, where there is two-sided, competitive bidding. Each trader comes to the market with valuations already in his mind more or less definitely. It may be that he is disposed to buy one unit if the price is high;1 if it is lower he will buy two units; if still lower, three units, etc. Or he is disposed to sell one unit at a certain price, two units if the price offered is higher, three if it is still higher, etc. The situation from the standpoint of the prospective buyers is represented in Figure 9. One of them (Bl) stands ready to purchase one unit at a price as high as 14 if he can do no better, but he will, of course, buy at a lower figure if possible. B 2 will, if he must, pay as high as 13 for a unit. Other buyers2 are willing to buy (one unit each) at prices respectively lower - 12, 11, etc. At the extreme end of the scale there are certain individuals who would be induced to buy only by a price extremely low - 4, 3,1, etc. The diagram,therefore, represents this situation where the individual (prospective) buyers have different mental attitudes (valuations) as cording to kinds of goods, to times, and to circumstances. A fall of a particular price by 1 per cent may correspond with an increase of demand by 1 per cent or 2 per cent or 10 per cent as the case may be. When eggs were 35 cents a dozen in Chicago (between 1909-1911) and fell to 34 cents the change in demand was hardly noticeable. But at 30 cents (about 15 per cent less) the demand rose from about 15,000 cases to 30,000 a week (100 per cent),-a considerable degree of elasticity. (The standard case contains 30 dozen.) At 20 cents a dozen demand was remarkably elastic, and additional supplies to the amount of 50,000 to 100,000 cases were taken (probably used as substitutes for meat, and to put into cold-storage) with hardly noticeable decline in price. Later, in June and July, however, when the demand for cold-storage purposes falls off, and possibly because eggs are somewhat less palatable in hot weather, the price fell lower (to 18, and one year even to 15 cents). When at a given price a small reduction in price inregards the good in question, and where in the aggregate the whole body of buyers stand ready to take the various amounts indicated, according as the prevailing price is higher or lower. If it is high they will take a relatively small quantity: if it is low they will take a larger amount. If, for example, the price should prove to be 12, it will be seen that only four units will be taken by the would-be purchasers. They will be secured, of course, by the most urgent buyers, B 1, B 2, B 3, and B 4.. There is no one else who stands ready to buy at a price as high as 12. There are others who would buy at a lower figure, but if the ruling market price is as high as 12 they are, by their own attitude of choice, necessarily excluded from the actual market transactions. Similarly for any other price in the scale there will be a definite number of included or actual buyers, and a definite amount of the good which in the aggregate will be taken by those buyers at that price. This amount, the demand, which the buyers will take at any specified price is a composite, the combined result, of course, of the bids of the various individuals concerned.
1 This set of valuations with which a trader enters a market reflects a disposition, an attitude of choice, a provisional judgment, which is subject to change with new conditions. See below on social factors in individual valuations.
2 Elasticity of demand. The changes of demand (and of supply) relative to a certain amount of change of price are very different accreases largely the amount that will be bought and sold, demand and supply are said to be elastic. For example, at 35 cents the demand for eggs in Chicago is relatively inelastic, and at 20 cents it is very elastic. See Fetter, Source Book in Economics, pp. 25-33, for description and diagrams of some seasonal price variations in food, from Professor H. C. Taylor's study of the subject.
FIG. 9. BuyErs' Composite Valuation CuRvE.
Fig. 10. Sellers' Composite Valuation Curve.
§ 2. Sellers' composite valuation curve. We may show in a similar way by Figure 10 the conditions of supply. S 1, the most urgent seller, is willing to sell one unit at a price as low as 4;3 S 7 will part with a unit at a price of 7.5 if he can do no better; S 12 will not be tempted to sell unless he can get 10 for a unit of the good, etc. Here again the diagram simply depicts the fact that at any given price there will be a certain number of actual or included sellers, and the amount offered by those sellers at that price, or the supply, will also be a definite quantity. At a low price this quantity is small; at a high price it is large.
§ 3. Price the resultant of demand and supply. Our question now is what is the market-price which naturally emerges from the demand- and supply-conditions which we have been considering. If one of these curves be superimposed upon the other, they are seen to cross at the point corresponding to ten units of sale-goods, and to the price of nine per unit. All that the diagram means is that under the supposed
3 It must not be thought that in the above diagrams B 1, B 2, B 3, etc., are necessarily all different people. B 1, who is willing to pay (if he must) 14 for one unit, may appear again as B 2, willing to buy a second unit, but not willing to pay as much for it as he would for a single unit, or as B 4, B 6, etc. That is, he is willing, like the other buyers individually, and like the group of buyers as a whole, to take a certain sum at a high price, and a larger sum at a lower price. This is in accordance with the principle of diminishing gratification which we have already discussed (eh. 4). Similarly S 1 may enter again as S 2, S 5, S 6, etc. That is to say, each seller (of divisible amounts of goods) is willing to offer more at a high price than at a low price. It is evident, then, that the principle of diminishing gratification lies at the bottom of the demand conditions and also of the supply conditions as they exist in a market at any given time. conditions of demand and supply (i.e., ten units offered by the sellers, and ten asked by the buyers at the same price, 9), the market-price which actually prevails will be the price (9) at which the demand and supply are equal. It is obvious that the number of units bought must be the same as the number sold. At the price 9, there can be and will be ten trades. In each of these ten trades there is some gain for each buyer and for each seller. (It matters not whether the most urgent buyer buys from the most urgent seller.) But not one of the buyers with a valuation less than 9 could trade with any of the sellers with a valuation more than 9. The only way in which any one of these excluded buyers or sellers could get into the trading would be by inducing some one on the other side to act by mistake contrary to his own interest, or from motives of pity or generosity, while at the same time one on the same side fails to act in accord with his own interest.4