Supply and Demand | Page 9

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 supply, and the price will tend to rise, i.e. to move upwards towards Om. Similarly if we suppose the price to be Ol, which is larger than Om, the supply (_l_R) will exceed the demand (_l_Q) and the price will fall downwards towards Om. Thus, again, we have deduced Law III from Laws I and II with the form and precision of a proposition in Euclid. Now, when once the eye has become familiar with this diagram, it ought to be impossible for the mind to lose even momentarily its grip on the fact that demand and supply are both dependent upon price. For these curves do not represent any particular amounts; they represent a series of relations between amount and price; if the price is QN the amount demanded is ON, and so forth. The terms demand and supply in the sense, in which I