Supply and Demand | Page 9

these very simple steps of reasoning
illuminate the nature of the normal equilibrium of demand and supply.
They reveal that the equilibrium is established and maintained by the
agency of changes in price, and they enable us to lay it down as
perhaps the most important thing that can be said about the price of
anything that it will tend to be such as will equate demand and supply.
But that is not all that they reveal. They reveal also the extreme
dependence of both demand and supply upon price.
Now this is a fact which it is most important to realize vividly. It is apt
to be obscured by customary modes of speech. In ordinary times the
prices of most commodities and services do not change by very much,
unless indeed over a long period of years; the amounts demanded and
supplied may therefore seem to maintain a fairly constant level; and we
may be tempted to speak of Great Britain producing so many million
tons of coal, or America consuming so many millions of motor-cars per
annum, almost as though these quantities were independent of price
considerations. But we should never forget that there is no service or
commodity produced by man, however essential it may seem, the
demand for or the supply of which might not be reduced to nothing, if
the price were sufficiently raised on the one hand, or lowered on the
other. How easy it is sometimes to forget this simple truth may be seen
from the mistake so commonly made of supposing, because the peoples
of Central Europe were left, on the cessation of the war, starving and
destitute of the means of life and the materials of work, that they must
necessarily become heavy purchasers of imported goods; without
pausing to consider whether the prices were such as they could afford

to pay.
§2. Diagrams and their Uses. It will help to prevent mistakes like this
and more generally to make sharp and clear the fundamental relations
which exist between demand, supply and price, if we exhibit them
pictorially in the form of a diagram. Such diagrams are of great service
in many parts of economic theory, not because they can prove anything
which could not be proved otherwise, but because, being really a
simpler medium of expression than words, they enable the mind to
grasp more readily and to retain more vividly the essential facts of
complex relations.
Figure 1:
Y | | S' | * D | ** |* ** | ** * | ** * | * * | ** ** | ** * | ** * | ** ** | ** *
| ** Q ** _l_|--------------*------------* R | |*** ** | | ** P **
_m_|--------------------*** | | *** |*** _k_|--------------***----+---** r |
_q_*| | *** | *** | | **** | *** | | **** | *** | | *** S |**** | | **** | | |
** D' | | | | | | | | | | | | 0+-------------------------------------------------------- X'
N M. Figure 1
In Fig. 1 the curve DD' represents the conditions of demand. It is
supposed to be drawn in such a way that if any point, Q, be taken on
the curve, and the perpendicular QN be drawn to meet the base line, or
axis OX, then ON will represent the amount that will be demanded at a
price represented by QN (or O_l_). In other words, distances measured
along OY represent prices, and distances measured along OX represent
quantities of the commodity, or service, or whatever it may be. Clearly,
then, the demand curve, DD', must slope downwards from left to right,
since the lower the price asked, the greater will be the amount
demanded. Similarly the curve SS' represents the conditions of supply.
It is supposed to be so drawn that if any point q be taken upon it, and
the perpendicular _q_N be drawn to meet OX, then ON will represent
the amount that will be supplied at a price represented by _q_N (or
O_k_). Equally clearly this supply curve must slope upwards from left
to right, since the higher the price obtainable, the greater will be the
quantity offered. Take the point P where the two curves meet, and draw
the perpendicular PM to meet OX. Then the third law enunciated at the

beginning of this chapter corresponds to the statement that PM or Om
will represent the price at which the commodity or service will be
exchanged.
It can readily be seen that no other price could be maintained. For
suppose the price to be less than Om, suppose it to be Ok, then, at this
price, ON (or _kq_) will be the amount supplied, and kr the amount
demanded. The demand will thus exceed the