Summary of the general theory of equilibrium of demand and supply

Book 5, Chapter 15

§1. Supply and demand are most likely to change when considering spacial and temporal elements. In the short run, supply capacities are fixed such that an increase in demand means higher prices. In the longer run, capacities can adjust to meet demand.

§2. The demands for complementary goods and production inputs are interdependent.

§3. Producers with access to “the gifts of nature” can earn exceptional rents from their cost advantage. On the other hand, inefficiently employed land or labor will mean less-than-normal profits.

§4. An increase in output in the short run generally leads to higher unit prices, but an increase over the long run might result in lower prices, due to the possibility of changing production technology. For dominant producers (with some measure of monopoly power), an increase in supply might lead to lower prices, which they will want to avoid.

§5. When seeking to promote “maximum satisfaction” (optimal social welfare), it is important to increase (decrease) supply where increasing (decreasing) returns to scale are present. Monopolists should therefore be encouraged (constrained) in their production choices.

When defining “value,” Ricardo has been twice misinterpreted. Some claim his cursory review of demand was dismissive when Ricardo thought demand’s importance too obvious to discuss. Second, Marx assumed Ricardo was only concerned with the quantity of labor used in production when Ricardo included labor quality, capital and timing in understanding the supply side of value.

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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