30: The Influence of Demand and Supply
Ricardo maintains that supply and demand have an effect "only of temporary duration" on the market price of a commodity, and that it is ultimately the costs of production that sets their price. Diminish the cost of producing a good, and its price will eventually fall, as supply will increase to meet the full quantity demanded at a price that is sufficient to pay the cost of production and provide an acceptable return on capital (provided that supplier are at liberty to lower their prices, and new suppliers at liberty to enter a given industry).
Moreover, the opinion that the price of commodities can be favorably influenced has become "almost an axiom in political economy and has been the source of much error." A temporary action can upset the balance, but unless there is constant action, the prices of things will eventually return to their natural level in comparison to one another.
Another common mistake is believing demand for a commodity to have increased if no additional quantity of it is purchased or consumed. An increase in price, in the absence of an increase in quantity demanded, is always the result of factors other than demand for a good.
Naturally, a product cannot be sold at below its cost of production for any length of time, as this is destructive rather than productive of value. Once it consumes whatever is being used to subsidize such production, it must halt.
Also, greater supply does not guarantee greater demand. While it is generally true that individuals will consume more of a good when it is in greater supply (hence lower cost), there is a theoretical maximum at which people have all they will consume. Even if the supply is increased and cost lower, they will demand no more. If the price of bread, through some advancement of science, fall by half, it does not mean that people who are sufficiently fed will suddenly demand twice as much.
Demand is created by want, and when want is satisfied, the value of additional measure of quantity is of less interest. Consequently, the ratio is supply to demand is not constant between the extremes: the more that is already being consumed, the less demand can be generated by lowering the price.
Another source ("the Earl of Lauderdale") echoes this notion: the value of a thing derives from the cost of producing it, and suppliers will compete toward that price, though the difference between the supply and demand of a good, at any given moment, will cause its value to vary. He also observes that there is no intrinsic value of any good - as it is the nature of trade to exchange one item for another, their values are dependent on one another.