2.1 The Basis of Value and of Supply and Demand
The valuation of an object is nothing more or less than the estimation of its ability to deliver utility to a given individual. The want for any particular object derives from multiple sources: his physical needs given the geography and climate of whatever place he happens to live; the laws and customs of his society; and so on. Much could be said of this, but a cursory consideration will suffice for the presen: Warm clothing is very much wanted in colder climates than in warmer ones. Fashionable clothes are more wanted in towns than in farming communities. Food is more wanted by a man with eight children than by a bachelor. There is no single and universal set of wants that are equally had of all consumers in all markets, though there are commonalities.
Certain wants are satisfied by the "gratuitous agency of natural objects." Our need for air is immediately satisfied at no great effort. In the right location and season, the need for food and water are likewise met with little exertion. But the majority of wants can only be satisfied by products - objects that are purposefully fashioned, with some degree of difficulty, to be suitable to a given purpose. And in this regard, there is the question as to whether a man may produce for himself the things he wants, or if he will seek to get others to produce them for him.
(EN: Say presupposes free and voluntary trade among individuals - but "to get others to produce" may involve other methods, the use of force and fraud by some to compel others to provide what is wanted. Governments and thieves rely on such methods with varying degrees of success.)
A person producing for his own consumption reckons that the value he will get from the product will equal or surpass the effort it requires to produce it. Where the product has value to others, he must consider whether he would derive greater utility from keeping it or trading it for whatever is offered in return.
No rational individual would habitually surrender something without receiving at least equal value in exchange. An error may be made, as man can only imagine or estimate the value of an object before he uses it, and will draw on his experience to rectify his estimation in future exchanges.
In trade, the price is an abstraction of the value to be received: what any item is worth in terms of money is a general guess of the utility of other products that may be obtained with a given sum of money. That is, where a house is valued at 4000 coins, a horse is valued at 200, and a bushel of wheat costs one coin, we are in fact assessing that the house delivers the same utility as eighty horses or four thousand bushels of wheat.
The valuation of objects in trade is a compromise between two parties' estimation of the utility of each object. The party selling the house may feel it is worth 4,000 bushels of wheat, the party buying it may feel it is only worth 3,500 bushels. Each considers his subjective needs and if any bargain is struck, it is a compromise.
In a market, the current price of things is considered to be some consolidation of the estimations of all buyers and all sellers: possibly but not necessarily a weighted mathematical average. The agreement is not binding on any individual, who can offer or demand whatever price he feels reasonable and refrain from engaging in trade if he does not agree with the majority.
When applying his effort to the creation of objects that he intends to trade, a man may consider the current market price as an estimation of the reward he may receive for undertaking a productive effort. This motivates him, or removes his motivation, to act. Time passes until he can realize the profit of his labor, and if the profit meets or exceeds his expectations, he is motivated to continue in his efforts if he believes there is additional future potential.
Some allege that the complexity of the market, the "infinity of products" that may be had in exchange for the proceeds of one's own productive effort, is considered. This is not entirely true: man is aware of his own needs, and has in mind the specific goods he will need in any period of time. There may be an infinity of goods available on a laborer's pay-day, but each laborer knows he needs to pay his rent, buy food for the week, set aside a few coins toward the boots he will need in a month or so, etc. It would be difficult for a theorist to survey and precisely assess the exact list of items needed by every member of a city - but there is in fact a specific and finite list.
Surveyors and statisticians are exceptionally good at assessing, in arrears, what was consumed. It can be calculated with some accuracy that the citizens of France consumed a thousand tons of sugar last week, just as surely as a merchant in a small town knows how many boots or horses he sold last week. And this may be a reliable method of predicting future consumption in the aggregate, though it fluctuates with the seasons, tastes, and fashions.
This figure, estimated or actual, represents an interaction between the demand and supply of a given good. But it has its limitations: to suggest that a thousand tons of sugar was in fact consumed does not consider that there more of it might have been consumed, such that more would have been consumed if it were available and affordable.
The consumption of a good reflects the amount of demand that was satisfied, not the actual amount of demand. Until such time as suppliers provide all that customers will consume at any price, a phenomenon that is unknown and likely unknowable for must goods, the figure does not represent actual demand.
Some mention is made of money in a society, which represents its capacity to purchase goods. The money to purchase may be earned in production, or it may be drawn from storage from past production. For most consumers, money is never available in sufficient supply to satisfy all of their desires to the fullest extent possible - and if it were, there would not be enough things available to purchase for it. That is, the money of the wealthiest individual cannot buy a thing that is not for sale.
Those engaged in commercial speculation (merchants and producers) must estimate the purchasing capacity of their consumers, just as consumers must estimate their own budgets. The producer of a luxury good must consider the amount of money that consumers in a market have after satisfying their basic wants. A market in which consumers live hand-to-mouth (all wages are spent on immediate needs) has little potential to purchase luxury goods at any price. Where consumers have sufficient coin to purchase the luxury item, those that want it can do so immediately. In other instances, the consumer must set aside the excess that is received a little at a time to purchase a luxury item.
When a product is raised in price, fewer consumers can afford to pay for it, hence fewer purchase it. As such there is an inverse relationship between price and quantity demanded, such that items sold at a high price have few customers and those sold at a low price can have many.
Price is also considered relative to income: even if an article's price is low, it may be unaffordable to those whose incomes are little. In poorer countries, the price of shoes is much less than in wealthier ones - but the citizens, earning little income, cannot afford them.
In respect to supply, the opposite is true: the higher the price of an item, the greater the profit to be earned by providing it, and the more producers and merchants will be eager to offer it.
As an aside, the difficulty in matching supply to demand is partially derived from the time required to produce and convey an item to one who demands it: most goods cannot be provided instantaneously, but require time to produce and convey to a market. Hence the demand for shoes today cannot be effectively met by supply today - but a supplier must estimate the demand that will exist by the time he is able to produce and transport shoes to the market, and by that time the level of demand may have changed. This is the value of maintaining an inventory, to provide for demand goods that were produced in the past to be readily available should demand suddenly increase. It is of great value to the consumers, but represents an investment with some risk for the suppliers.
An excess of supply does not necessarily signify the complete satisfaction of demand. It instead signifies that suppliers are demanding a price for their goods that consumers are unable or unwilling to pay.
Unless there is cause for consumers to expect a significant change in the future, the general expectation that the price of things today will be the price of things tomorrow. If such cause exists, it will influence current prices. For example, the amount of wine in a market will influence its price - the more that can be had, the less consumers are willing to pay for it. However, since wine can be kept for future consumption, the expectations of a future vintage will influence the expectations: if the grape-farmers are having a difficult year and expect to bring in a poor crop, the price of wine currently in the market will increase due to expectations that there will be less in the future; and if the framers are having an excellent crop, the price of present wine will drop in expectation of future abundance.
While abundance and scarcity influence the value of an item, sometimes to a significant degree, these are secondary influences to the utility the item provides. Lowering the price of an item does not create demand for an item that conveys no benefit to the owner.
Insofar as suppliers are concerned, they are eager to profit by charging the highest price they can get, but must settle for what consumers are willing to pay. If the price consumers are willing to pay is less than the cost to produce and transport the item, there is no incentive for production and suppliers will find more profitable means of investing their capital and productive ability.
There is the notion that suppliers may withhold a item from the market to create an artificial scarcity and thereby increase its price. There is a limit to their ability to do so, as their entire costs of production must be covered, so they must lower the price by at least as much as is necessary to cover their costs and repay their creditors. And in a competitive market, sellers must compromise - no single seller has the power to create a monopoly against competitors who, eager to cover their expenses and make what profit they can, will lower prices to convert their inventory to coin.
The interference of government to fix prices at a fair level is unnecessary or counterproductive. If it attempts to make the price fair to both consumer and supplier, it is doing nothing more than would have naturally occurred in the course of voluntary negotiation. If it attempts to make the price favorable to consumer or supplier, the opposite party will be dissuaded from engaging in commerce. The arbitrary whim of law does not make people need a product more or less than they actually do, nor willing to involve more or less effort in its production than the reward would merit.
Say strays briefly into the real of ethics before backing away from the topic. What constitutes a fair price is negotiated between buyer and seller, and the vices and virtues of their character figure into their estimation. A man can be counseled as to what he should want, and advised as to what things are wasteful, but this is inconsequential to the economist.