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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 O_m_ 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 O_m_, suppose it to be O_k_, 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 O_m_. Similarly
if we suppose the price to be O_l_, which is larger than O_m_, the
supply (_l_R) will exceed the demand (_l_Q) and the price will fall
downwards towards O_m_. 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 a
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