Introductory. On Markets

Book 5, Chapter 1

Book 5 concerns “General relations of demand, supply and value.”

§1. Price balances supply and demand. Marshall defers discussion of other factors affecting supply, demand and prices — money, credit, foreign trade, labor, and so on — to a later volume, which he never wrote.

§2. In a “market,” buyers and sellers see the same price for the same good. Most markets are local (e.g., a street market) but they can be physically separated if information flows allow price comparison and thus convergence (subject to transport costs).

§3. Improved communications and transport have created “wide” markets for the same goods, with similar prices. Commodification and standardization makes it easier to have wider markets. Goods that are heavy relative to their value (Mashall uses bricks, but water also fits) will be traded in “narrow” markets where prices reflect local supply and demand.

§4. Markets for gold, silver and (heavily traded) stocks and bonds will tend to have one global price. Traders will ask small margins (bid-ask spreads) for these “liquid” assets, since they are sure to find counterparties. Illiquid assets have larger bid-ask spreads and more price noise.

§5. Custom-made goods (e.g., tailored suits or portraits) and perishable or bulky goods will sell for a range of prices, especially if trade is infrequent. Prices from wide liquid markets (e.g., London) will influence prices in narrow illiquid markets if some traders can switch between markets to get better deals. This arbitrage converges prices.

§6. Besides space, time influences supply and demand. Here Marshall makes some insightful comments (which are often buried/forgotten by vague references to elasticity), i.e.:

We shall find that if the [time] period is short, the supply is limited to the stores which happen to be at hand [Qs is fixed and vertical; D goes up/down to determine P]: if the period is longer, the supply will be influenced, more or less, by the cost of producing the commodity in question [S slopes up; D goes up and down more gradually to determine P]; and if the period is very long, this cost will in its turn be influenced, more or less, by the cost of producing the labour and the material things required for producing the commodity [S shifts in or out]. These three classes of course merge into one another by imperceptible degrees. p 275

The next chapters explore these dynamics.

This post is part of a series in the Marshall 2020 Project, i.e., an excuse for me to read Alfred Marshall’s Principles of Economics (1890 first edition/1920 eighth edition), which dominated economic thinking until Van Neumann and Morgenstern’s Theory of Games and Economic Behaviour (1944) and Samuelson’s Foundations of Economic Analysis (1946) pivoted economics away from institutional induction and towards mathematical deduction.

Author: David Zetland

I'm a political-economist from California who now lives in Amsterdam.

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