this principle, with any advantage, to the solution of
the question which now occupies us, the principle itself, and the idea
attached to the term demand, must be conceived with a precision, which
the loose manner in which the words are used generally prevents.
It is well known that the quantity of any commodity which can be
disposed of, varies with the price. The higher the price, the fewer will
be the purchasers, and the smaller the quantity sold. The lower the
price, the greater will in general be the number of purchasers, and the
greater the quantity disposed of. This is true of almost all commodities
whatever: though of some commodities, to diminish the consumption in any
given degree would require a much greater rise of price than of others.
Whatever be the commodity--the supply in any market being given, there
is some price at which the whole of the supply exactly will find
purchasers, and no more. That, whatever it be, is the price at which, by
the effect of competition, the commodity will be sold. If the price be
higher, the whole of the supply will not be disposed of, and the
sellers, by their competition, will bring down the price. If the price
be lower, there will be found purchasers for a larger supply, and the
competition of these purchasers will raise the price.
This, then, is what we mean, when we say that price, or exchangeable
value, depends on demand and supply. We should express the principle
more accurately, if we were to say, the price so regulates itself that
the demand shall be exactly sufficient to carry off the supply.
Let us now apply the principle of demand and supply, thus understood, to
the interchange of broadcloth and linen between England and Germany.
As exchangeable value in this case, as in every other, is proverbially
fluctuating, it does not matter what we suppose it to be when we begin;
we shall soon see whether there be any fixed point about which it
oscillates--which it has a tendency always to approach to, and to remain
at.
Let us suppose, then, that by the effect of what Adam Smith calls the
higgling of the market, 10 yards of cloth, in both countries, exchange
for 17 yards of linen.
The demand for a commodity, that is, the quantity of it which can find a
purchaser, varies, as we have before remarked, according to the price.
In Germany, the price of 10 yards of cloth is now 17 yards of linen; or
whatever quantity of money is equivalent in Germany to 17 yards of
lin
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