15: The Influence of Verification on Price
It can readily be observed that the price of an article remains the same over a long period of time, and while there are fluctuations of supply and demand they seem to have very little influence on the price, which remains very close to its long-term average. Prices change significantly in times of severe shortages or surpluses, so it cannot be denied that supply and demand have some affect, but it is unlikely they are the only influences.
From the perspective of the buyer, a good is never purchased because of its price, but because it is serviceable to his need. A man who is not hungry, and has an ample supply of food, does not purchase more than he needs (and can be preserved) even at a very low price. So in determining the amount he is willing to pay, or whether to purchase at all, the buyer first considers the serviceability of a thing to his needs.
While some products are commoditized, others have variances in quality that render them more or less suitable to a need. There is a minimum level of quality that buyers require (no-one will purchase moldy bread), and a maximum level of quality for which they will pay (some will make due with day-old bread rather than fresh because of their limited means). For some goods, there is not much variation (salt is salt, provided it is pure) whereas for other goods, there is significant variation (wine, tobacco, and tea have many varieties and grades of goodness).
(EN: The example of salt calls to mind that in the present day, when goods are plentiful, more gradations of quality have been created by suppliers. There are, in fact, many grades of salt - while common table salt is cheap and people will not generally pay for a brand-name, there are specialized salts that can be ten or twenty times the price of standard salt.)
The buyer may also consider the price of a product over the cost of producing it for himself. There is really no need to pay a miller for flour, as anyone can grind wheat between two stones to produce flour - but it takes a great deal of time and effort to do so. And so, if the miller offers flour at a price that is seen as worthwhile (disregarding quality for the moment), then a buyer sees it as worth the price. He is not buying the good, but buying his own time and liberty to participate in more pleasant activities than grinding his own flour.
There's a brief mention of government intervention in trade to grade and standardize products, as dishonest sellers will often "doctor" products to make them appear to be of better quality than they are. He mentions, specifically, the process of treating old seeds - soaking them and subjecting them to the fumes of burning sulfur, to give it the appearance of being fresher than it was while destroying its "vegetative power" and then representing it as fresh. The farmers who bought that seed found it to be sterile weeks after the sale, by which time their culprit had moved on.
(EN: In his usual fashion, Babbage lays on other examples of products that had been doctored, or simply misrepresented, to inexperienced buyers, which his increasingly easy to do in a market where more goods are available. A person cannot be an expert in assessing the quality of everything, and must rely on an authority to assess, report, and identify fraudulent sellers.)
The principle that price is dependent on supply and demand is most accurate when there are a very large number of buyers and sellers of a good and their interactions are known to one another. When there are few buyers or sellers, the have increased negotiating power to set the price of the transaction or to leave the other party unsatisfied. When buyers and sellers are unaware of the prices others have struck, they cannot assess their options and cannot consider the larger picture.
It follows that the greatest disruptor to supply and demand is monopoly - the control of supply by a single party, to whom buyers have no alternative, which places them at a significant disadvantage. Monopolies, however, do not arise in nature - if there is a single seller who demands an unfair price, entrepreneur will seize the opportunity to undercut him. A monopoly must be created by government, by special license or permission, and government may then demand terms of its one in exchange for this privilege to ensure the public is not devoured by the monster it has created.
He speaks for a time about the operation of post offices, which is a government created (and often government operated) monopoly on the delivery of letters and parcels. To avoid public uproar, the post office publishes a rate of fees for delivery that must meet with the approval of government. When it functions properly, government acts as a broker to ensure the supplier is adequately compensated and the customers are not unfairly overcharged.
He speaks briefly of the desperation of sellers, for whom the public seems to have little sympathy. One of the greatest influences on the price demanded by sellers is the perishability of goods. Sellers of gold and gemstones have little pressure to strike a deal because their inventory is for all concerns immortal. Sellers of wheat have some pressure because their product will decay over time. Or consider the special case of those who sell ice, transported by ship from the artic: they must be in a panic to sell their goods before they melt - such that ice will never likely sell at much of a premium.
In general, sellers are motivated to price their goods to cover the cost of their production (which is necessary if they are to remain in business) and generate a sufficient profit to compensate them for undertaking the investment and the risk in producing a good that is not guaranteed to sell, or even to be produced. Their minimum price must cover cost of production, and their maximum is whatever buyers are willing to pay.
He at last speaks of investors, who furnish capital to producers in exchange for a share of the revenues or a fixed payment based on the simple interest on a loan. To guard their interests, they will fund only ventures they feel are likely to produce enough revenue to repay their investment. The point here is that unless someone seeks to produce from his own fortune, he is not entirely independent and is beholden to someone who demands a certain profit.