prices. The demand for salt, on the contrary, would probably be less elastic at prices so high that it would be used only as a food than at prices low enough to permit its use (as at present) for various industrial purposes. Without giving further concrete examples, the following propositions respecting elasticity of demand may be stated: (1) Demand for necessities is in general less elastic than demand for luxuries. (2) Demand for commodities the use of which constitutes a habit is less elastic than demand for commodities the use of which is generally a matter of conscious decision. (3) The more adequate the substitutes for a particular commodity, the more elastic will be the demand for it. (4) The demand of persons of large income is less elastic than that of persons in poor or moderate circumstances. (5) A corollary of proposition four is that the higher the general level of well-being in a community, the less elastic will be the demand for most commodities.

The rectangle OMPA (in any one of the three diagrams) represents the total amount buyers pay for a certain commodity when the price is MP, just as the rectangle OM'P'A' represents the total amount paid when the price is M'P'. If the demand for the commodity is distinctly inelastic, this total value will be less when the price is low than when the price is high.1 At the lower price less money will be expended for this particular commodity and more money will be available for other uses. If, on the other hand, the relations between price and demand are such that the rectangle OM'P'A' is larger than the rectangle OMPA, a drop in price from MP to M'P' will result in a curtailing of expenditures for other things. This might involve only a decreased use of direct substitutes, such as coal in place of wood; generally, however, it would mean a diminished consumption of a number of other things. But this is a gain, not

1 Elasticity of demand may be represented mathematically by a fraction whose denominator is the relative (or percentage) decrease in price and whose numerator is the corresponding relative increase in the amount demanded. Following the notation used in Figures 2 and 3, this is the ratio of MM'/OM to AA'/AO. When the elasticity of demand, thus expressed, is equal to MM'/OM + 1, the rectangles OMPA and OM'P'A' are equal; that is, the same total amount is expended for the commodity when the price is MP as when the price is M'P'.

a loss. For the lower price would not be accompanied by the purchase of a larger quantity, if the additional purchases did not satisfy more intense wants than other things that might have been purchased with the money. Larger "dollar's worths" will have been substituted for smaller ones.

In this way the demand for any one commodity is affected by changes in the prices of other commodities. The competition of the market thus embraces not only the buying and selling of one commodity, but also the buying and selling of all commodities. In this sense the wood dealers compete with the grocers and the tailors, as well as with the coal dealers and with each other.

Consumers' Surplus. Whatever the price of a competitively produced commodity may be, there are almost always some buyers who would have paid more if it had been necessary. Referring to Figure 1, if the price is M'P', those who are just willing to pay that price, who would either have bought less or bought none if the price had been higher, may be called the marginal buyers. These are relatively few in number, however, as compared with those who would have bought even if the price had been higher. The utility of the marginal purchases to the buyers is but little more than the utility of other things that could have been bought with the same amount of money in such cases the utility of the purchase only about equals the sacrifice involved. In the case of all other purchases, however, there is a surplus of utility over costs (whether costs are measured as money costs or as the utility of the other possible purchases which are given up) which is called consumers' surplus (or sometimes consumers' rent, or buyers' gains).

It might be supposed at first thought that if the price were, for example, M'P' (Fig. 1), the area included between the horizontal line A'P' and the curve DP1 would represent consumers' surplus. This is not exactly true, however, and that for two reasons: in the first place, the satisfaction of additional wants which a lower price makes possible may make the more important wants less intense. A man might be willing to give ten dollars for a cord of wood in order that at least one room in his house could be heated during the winter. He might also be willing to give seven dollars a cord for two cords, so as to heat two rooms, but the heating of the second room might render the heating of the first room less important to him. He might not be willing, for example, to give ten dollars plus seven dollars in order to have the two rooms heated. In the second place, utility itself is to a large extent affected by price. So far as our purchases satisfy what has been called the desire for distinction, or represent what Professor Thorstein Veblen has called "conspicuous consumption," a lowering of the price of a

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commodity would lessen its utility to us. The successful production of artificial diamonds at a low cost would lessen the desire which most people have for natural ones. If touring cars were less an indication of one's ability to spend money freely, they would be less esteemed by not a few people. On the other hand, it might occur in some cases that a certain amount of decrease in the price of a commodity, permitting a more general consumption of it, would increase the esteem in which it is held by those who are glad to follow fads. In general, we must say that even if we had absolutely complete statistics of the actual relation of prices to demand, consumers' surplus would still be an incommensurable thing. It is nevertheless a real thing, and is especially significant as constituting one of the differences between real income and money incomes.

It should be noted, however, that consumers' surplus relates only to one's consumption of a particular commodity, taken by itself, for, as we have seen, the amount which we are willing to spend in the purchase of any one commodity depends not only on the price of that commodity, but also on the prices of the other commodities that make up our purchases. The surpluses which a consumer gets in his different lines of consumption cannot be added together to form a total. I might, for example, be willing to pay as much as four dollars for a hat that I can get for two dollars. And if I pay only two dollars for the hat I might be willing to pay as much as six dollars for a pair of shoes that I can get for four dollars. But it does not follow that I should be willing to pay four dollars for the hat and six dollars for the shoes.

The Nature of Supply. The amount of goods that will be supplied in a given market at a given time depends, like the amount demanded, on the price. "Forced sales," in which goods are offered for whatever can be got for them, form about the only important exception. The effect of price on supply varies, however, according to the length of time that is taken into consideration. The work that is being done today in the extension of old factories and the building of new ones, the construction of railways, the taking up of new land, is based on estimates of future prices, the present prices of agricultural and manufactured products and of railway transportation being of significance only so far as they indicate what future prices will be. The merchant's stock in trade is bought on an estimate of future business conditions; the amount of land the farmer allots to wheat and corn, respectively, depends on his estimate of the relative prices the two will bring after the harvest. In a

similar way the amounts of goods that can be supplied to the market today are limited by the estimates which business men and farmers have made in the past of the prices which buyers are willing to pay today. It would be possible, though not necessary for our purposes, to analyze the way in which the amount of the capital and labor which have thus been applied to the production of things that will satisfy present wants was partially determined by conditions which existed still farther back in the past, and so on in an indefinitely receding series.

The amount of goods available for the market of today is thus determined not only by past estimates and conditions, but also by present estimates of future conditions. Every seller has the option of selling at the present price or of waiting for possibly higher future prices - an option which is limited only by the perishability of his goods and the urgency of his need for money. And the most urgent need for money does not necessarily force an immediate sale if his opinion as to the future value of his goods is a reasonable one, for in this case it is usually easy to borrow money on the strength of the marketable value of the goods.

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The Supply Curve. In the analysis of the conditions of supply existing in a particular market at a particular time we do not have to take account of the limitations imposed by the forms which productive efforts have taken in the past. At any given time a certain definite amount of a commodity is available for the market: this forms what may be called the potential supply. The proportion of this potential supply that sellers will be willing to

MMM"

FIG. 4.

part with at a particular time will depend primarily on the prices they can get. If the price of a unit of a commodity is M'P' (Fig. 4), the sellers will be willing to sell a certain number of units of it, which may be represented by OM'. If the price were

as low as PM, however, some sellers would prefer to wait for higher prices, the amount thus withheld from the market being represented by MM'. At the price M"P", however, an additional supply (M'M") of the commodity would be forthcoming from sellers who were not tempted by the price M'P'. In general, the supply curve SS' represents the relations between price. and the amount that will be supplied in a particular market and at a particular time.

The Determination of Price. The foregoing discussion of the nature of demand and of supply makes it possible to ad

combined in one diagram. If the curve DD' represents the potential demand in a particular market at a particular time, and the curve SS' represents the potential supply, the price which would be fixed by the free working of competitive forces would be PM, located at the point where the two curves cross. At this point demand and supply are equal, both being represented by OM. It is impossible that the price should be fixed at any other point, M'P', for example. For if M'Q be drawn so as to equal M'P', it will be evident that at this price OM" units will be demanded, while only OM' units will be supplied. Most of the buyers, however, are willing to pay more than M'P' if necessary, so that in order to secure their share they will bid the price up until an equilibrium is reached. This is what John Stuart Mill meant when he said that "value always adjusts itself in such a manner that the demand is equal