CHAPTER V. EQUILIBRIUM OF NORMAL DEMAND AND SUPPLY, CONTINUED. BOOK V. CH. V. The economic § 1. IT has already been noticed that in economic phrase a market is the whole of any district in which trade intercourse is so far free that prices tend to adjust themselves to one level easily and quickly; and that, what is even more ket is wide important for our immediate purpose, the use of the term is as to space as elastic with regard to time as it is with regard to space. wider as to The dealings in a market, in the discussion on which we are use of the term mar and still time. Our use of the term elastic, now entering, are to be taken as ranging over a sufficiently long period of time for the conditions of normal demand and normal supply freely to act, and freely to react on one another. The length of the period required for this purpose is different in different cases; but in every case it must be sufficiently long to cover over the effects of minor disturbances and passing fluctuations; it must be long enough to allow the economic forces concerned to work themselves out with some approach to regularity and law'. There is thus great elasticity in the scope which we Normal is assign to a market and in the range of the forces of whost action we take account: and in each separate application of our general reasoning a clear indication has to be given as to what conditions are taken as fixed and what as variable, au! as to the length of the period to which the whole inquiry relates. This is indeed done more or less systematically IL the ordinary conversation of business life. When it is sad 1 The reader is here referred to the account of the term Normal given in B I. Ch. vì. § 1. ELASTICITY OF THE TERM NORMAL. 419 CH. V. that the price of wool on a certain day was abnormally high BOOK V. though the average price for the year was abnormally low, that the wages of coal-miners were abnormally high in 1872 and abnormally low in 1879, that the (real) wages of labour were abnormally high at the end of the fourteenth century, consistentand abnormally low in the middle of the sixteenth, everyone ordinary understands that the scope of the term normal is not the usage. same in these various cases: everyone takes the context as itself an informal interpretation clause indicating the special use of the term in each several case. In ordinary conversation indeed a formal interpretation clause is seldom necessary, because misunderstandings can there be nipped in the bud by question and answer; and though it is more often required in written arguments which have not that safeguard, yet even there it will be found that in the large majority of cases the context explains itself so clearly as to leave no room for doubt. Thus the difficulty arising from the elastic use of the term Normal need not be a serious one, if it is fairly faced: while on the other hand much confusion and fruitless controversy have arisen from ignoring it. ly with the equili demand may be into two to which § 2. But though applications of the term Normal are Studies of thus elastic, and capable of being extended gradually from brium of very short to very long periods; yet these periods may be normal divided roughly into two classes. In the first class there and supply is time for the supply of those things which are used in divided producing the commodity (or in other words, its factors classes as of production), to adapt itself to the demand; in the second the periods class there is not. The relation which this first class of they relate are long or normal equilibria bears to the second may be made clearer comparaby observing that it is similar to the relation which this second class bears to the temporary equilibria discussed in Chapter II.; for there the period over which we were studying the action of the forces of demand and supply was so short, that cost of production could not exercise any direct influence over the supply price. tively short. from fish For instance, on the day following a large catch of Illustration mackerel the price in the market may settle down after markets. Temporary little manoeuvring to an equilibrium level at as many CH. V. equilibrium. Oscilla tions of market price about shortperiod normal supply price. BOOK V. pence as it had been at shillings on the previous day; and this change will in no way depend on the normal cost of catching mackerel, it will be governed by the volume of the past catch, with perhaps some slight reference to the chance that a similar catch may be had on the morrow. If we suppose the boat owned by a capitalist undertaker who pays the fisherman by the day, the net earnings of his boat for the day will be the excess of the price he gets for his fish over his outlay for wages and stores, together with allowance for the injury done to the boat and net by the day's work. This excess will be a Producer's Surplus or Quasi-rent, which for that particular day may be either more or less than the normal supply price required to make it worth his while to provide the boat and its equipment and the business organization needed for managing it and selling its catch. But if, in the long run and on the average, the Quasi-rent is more than this normal supply price, capital will drift into the fishing trade; if less, it will drift out; that is to say old boats and nets, when worn out, will seldom be replaced. And therefore, if the general conditions of the fishing trade are "Stationary" the earnings of the boat will oscillate about this normal supply price as a position of stable equilibrium. Oscillations of shortperiod normal supply price about its equili brium position. But next suppose there to be great increase in the general demand for fish, such for instance as might arise from the spreading of a disease through all kinds of farm stock simultaneously, by which meat was made a dear and dangerous food. The increased demand for fish could not well be met without bringing into the fishing trade some people from outside, who were not fitted by training to do its work well, and to whom many of its ordinary incidents would prove great hardships. Old and unsuitable boats would be pressed into the service; and if seaworthy would earn a surplus, or Quasi-rent, above their expenses of working, which they could not earn before: while the better class of boats would earn a Quasi-rent that would amount in a single year to fifty per cent. or more of their total cost; and able fishermen, whether paid by shares or by the day, might for a time get twice their ordinary wages; and the (shortperiod) normal price of fish would be higher than before. LONG AND SHORT PERIODS. 421 CH. V. Variations in the catch of fish from day to day might make BOOK V. the market price oscillate at least as violently as before about this normal level, but that level for an increased amount would rise rapidly with every such increase of demand. periods an produced always normal Of course these high prices would tend to bring capital For short and labour into the trade: but if it were expected that increase in the disease among live stock would not last very long, and the amount that therefore the unusual demand for fish would die away nearly in a few years, people would be cautious about investing raises capital and skill in a trade that was in danger of being supply glutted. And therefore, though when the demand slackened price. off, the price would fall too, and probably below its old level; yet so long as the demand was fully maintained the price would keep up. And here we see an illustration of the almost universal law that an increase in the amount demanded raises the short-period normal supply price. period demand brium. But if we turn to consider the long-period normal supply price, we shall find that it is determined by a different set of causes, and with different results. For suppose that the Long disuse of meat causes a permanent distaste for it, and that normal an increased demand for fish continues long enough to enable and supply the forces by which its supply is governed to work out their in equili action fully. The source of supply in the sea might perhaps show signs of exhaustion, and the fishermen might have to resort to more distant coasts and to deeper waters, Nature giving a Diminishing Return to the increased application of capital and labour of a given order of efficiency. On the other hand, those might turn out to be right who think that man is responsible for but a very small part of the destruction of fish that is constantly going on; and in that case a boat starting with equally good appliances and an equally efficient crew would be likely to get nearly as good a haul after the increase in the total volume of the fishing trade as before. In any case the normal Real Cost and therefore (the general purchasing power of money being assumed stationary) the normal Money Cost of equipping a good boat with an efficient crew would certainly not be higher, and probably be a little lower after the trade had settled down to its now increased dimensions than before. For since fishermen CH. V. BOOK V. require only trained aptitudes, and not any exceptional natural qualities, their number could be increased in less than a generation to almost any extent that was necessary to meet the demand; while the industries connected with building boats, making nets &c. being now on a larger scale would be organized more thoroughly and economically. If therefore the waters of the sea showed no signs of depletion of fish, an increased supply could be produced at a lower price after a time sufficiently long to enable the normal action of economic causes to work itself out: and, the term Normal being taken to refer to a long period of time, the normal price of fish would decrease with an increase in the amount produced. A Illustration from the cost of production of cloth. § 3. To take an illustration from manufacture let us revert to the case of the supply price of a certain amount of particular kind of cloth'. We saw that to estimate it a person would first calculate the supply prices of all its different factors of production with reference to the amounts of each of them that would be wanted, and on the supposition in the first instance that the conditions of supply would be "normal." But now we have to notice that he would give to this term a wider or narrower range according as he was looking more or less far ahead. Thus in estimating the wages required to call forth an adequate supply of labour to work a certain class of looms, he might take the current wages of similar work in the neighbourhood: or he might argue that there was a scarcity of that particular class of labour in the neighbourhood, that its current wages there were higher than in other parts of England, and that looking forward over several years so as to allow for immigration, he might take the normal rate of wages at a rather lower rate than that prevailing there at the time. Or lastly, he might think that the wages of weavers all over the country were abnormally low relatively to others of the same grade, in consequence of a too sanguine view having been taken of the prospects of the trade half a generation ago. He might argue that this branch of work was overcrowded, that parents had begun to choose other 1 Above, Ch. III. § 5. |