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Rh to state the general law of supply and demand as governing value. Excluding the simple case of the barter of two commodities of which the rate of exchange will be determined as explained above in reference to marginal utility, and meaning by, demand the quantity demanded in a market at a certain price, and by supply the quantity there and then offered at a certain price, the general law may be stated thus: In any market the price of any article will be so adjusted ggsilf that the quantity demanded will exactly "equal the dem-ml quantity offered at that price. The force by which the xgply adjustment is made is, in general, competition. Thus, if the price were above the point indicated by the law, there would be a lessened demand, and the competition of sellers would tend to lower the price. Conversely, if the price were lower the competition caused by the increased demand would tend to raise it. The law as thus stated corresponds to what Mill calls the equation between demand and supply. He was induced to adopt this phrase in place of the more popular expression, the ratio of demand to supply, on the ground of its greater accuracy. And, if the term ratio is to be taken strictly, no doubt Mill's criticism is perfectly just. At the same time the equation must be stated very carefully to avoid falling into the truism suggested by Cairnes, namely, that in any market the quantity bought at any price is equal to the quantity sold at that price. The point is that in accordance with the general principles of supply and demand the quantities offered and demanded vary with the price. And, however inaccurate the literal use of the term ratio may be, it has the advantage of suggesting a change of price according to changes in demand and supply. The equilibrium between demand and supply was illustrated by Cournot by the intersection of the demand and supply curves, and for purposes of theory this mathematical method offers great advantages.

It may be useful at this point to consider the principles by which monopoly values are regulated. The simplest case is "Mm when one individual possesses the whole stock, and poly the cost of production is so small that it may be "°'“"° neglected. Take the case, for example, of some natural well having a unique character for the mineral waters it supplies. The monopolist will, in the first place, have to discover the law of demand for his article. If he fixes a very high price, he may only occasionally sell a pint to a king; or a millionaire; whilst, if he fixes a very low price, he may sell to every peasant and yet get a very poor return. He will, in fact, have to work out a problem in mathematics, and must so adjust his price that the quantit'y sold multiplied by the price per unit will be a maximum. The same kind of difficulty is found in the case in which the expenses of production, although considerable, are practically fixed or only increase slightly in proportion to the quantity furnished. The minimum price will be given by the expenses of production, whilst the actual price will tend to be such as to yield the maximum profit. Take, for example, the case of a steamer which has a practical monopoly and is not controlled by government. The owner will not send out the steamer at all unless the passengers and cargo pay the expenses; but, if there is a great demand, he will raise the price so as to secure a maximum profit. In general, however, any increase in the quantity of the article produced (or the service rendered) will be accompanied by an increase in the necessary outlays, and this increase may be greater or less per unit. In these cases the calculation of the maximum profit is a matter of great difficulty. » Take, for example, the case of a railway which has a monopoly in a certain tract of country. The manager may aim at keeping down expenses and charging high "rates, being contented with a moderate trafic; or he may lower his charges and incur additional expense to increase the gross income. It is worthy of remark that in many cases the monopolist has a choice of two methods which give practically equally good results, one starting with low and the other with high prices. But it is clear that the mass of the general public or the great body of consumers have an-interest in low prices being adopted, whilst, on the other hand, the tendency is usually for the monopolist l to charge higher prices than are really profitable in a maximum degree. The simplicity of the method of high prices is always attractive and often deceptive. Accordingly, even on these very general grounds, the interference of government with monopolies may sometimes be defended as being in the interests of the public and not against the interests of the monopolists. The' case of the parliamentary third-class tickets furnishes an instructive example. At first the railways made their parliamentary trains as slow and inconvenient as possible, whereas now there is hardly a train which does not carry passengers at parliamentary rates without co ulsion. As a rule, however, in modern commercial countx legal monopolies are gompm, an exception. Any one, for example, can prosecute tion any trade or manufacture if he can provide the re- """'” quisite skill, labour and capital; and even as regards land -at any rate in the greater part of England and Scotlandthere is from the point of view of cultivation no real monopoly. But although legal monopolies (apart from patents and the like) are not general, and in most countries the law is adverse to the creation of monopolies) as a matter of fact in modern times there has been an increasing tendency to the amalgamation of businesses of all kinds into large combinations (trusts, kartells, &c.), which have the power of monopolies. In the same way in the relation of labour and capital the method of collective bargaining partakes of the character of monopoly. There may be buyers' aswell as sellers' monopoly, and capitalistic combinations operate by this method in dealing with the production of raw material or other requisites and also with labour. I

The theory of monopolies being a case of the determination of maxima is essentially mathematical, and many of the problems, especially as regards the incidence of taxes and the benefits of the public acquisition of “ natural "~ monopolies, can only be fully explained mathematically as by Marshall. In recent years great attention has been given to the realistic study of monopolies (]. W. ]enks, H. W. Macrosty, &c.; see TRUSTS). When competition arises, and is effective, exceptional profit ceases, and thus a new principle for determining values comes into play. If the producer of any article is obtaining more than the usual rate of profit, he at once provokes competition, and thus even the dread of this possible competition may keep down prices. This is often expressed by saying that the potential supply affects prices almost as much as the actual supply. It thus becomes obvious that, as regards freely produced commodities the production of which may be extended indefinitely at the same or at a decreasing cost, the value tends to conform to the minimum cost of production, and that any other value is consequently unstable. It will be observed, however, that cost of production "only determines values by operating through the actual or potential supply, and thus that the law of demand and supply is fundamental. Once a thing is made, the actual cost of production has no influence on its value, except as indicating the conditions of future possible supply.

At this point it becomes necessary to analyse and explain the nature of cost of production. In the last resort it will be found that nothing can be produced without gut", labour, and in a modern society capital must be Produa added. Thus the component elements of production “°" are labour and capital acting by natural forces upon raw material. But, since both the forces and the produce of nature require labour and capital for their exploitation, the elements that must be considered primary and fundamental in the case of commodities that can be indefinitely increased are labour and capital. Capital, again, is itself a product of labour, and it is also Wealth set aside by the owner for future use- instead 1 The general theory of monopolies was admirably treated by the French mathematician and economist Cournot, Recherches sur les principles malhématiques de la théorie des richesses (1838), and as far as possible without mathematics in the Revue sommaire des doctrines économiques (1877). »