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2. Direct Exchange

8. Stock and the Total Demand to Hold

There is another way of treating supply and demand schedules, which, for some problems of analysis, is more useful than the schedules presented above. At any point on the market, suppliers are engaged in offering some of their stock of the good and withholding their offer of the remainder. Thus, at a price of 86, suppliers supply three horses on the market and withhold the other five in their stock. This withholding is caused by one of the factors mentioned above as possible costs of the exchange: either the direct use of the good (say the horse) has greater utility than the receipt of the fish in direct use; or else the horse could be exchanged for some other good; or, finally, the seller expects the final price to be higher, so that he can profitably delay the sale. The amount that sellers will withhold on the market is termed their reservation demand. This is not, like the demand studied above, a demand for a good in exchange; this is a demand to hold stock. Thus, the concept of a “demand to hold a stock of goods” will always include both demand-factors; it will include the demand for the good in exchange by nonpossessors, plus the demand to hold the stock by the possessors. The demand for the good in exchange is also a demand to hold, since, regardless of what the buyer intends to do with the good in the future, he must hold the good from the time it comes into his ownership and possession by means of exchange. We therefore arrive at the concept of a “total demand to hold” for a good, differing from the previous concept of exchange-demand, although including the latter in addition to the reservation demand by the sellers.

If we know the total stock of the good in existence (here, eight horses), we may, by inspecting the supply and demand schedules, arrive at a “total demand to hold”—or total demand schedule for the market. For example, at a price of 82, nine horses are demanded by the buyers, in exchange, and 8 - 1 = 7 horses are withheld by the sellers, i.e., demanded to be held by the sellers. Therefore, the total demand to hold horses on the market is 9 + 7 = 16 horses. On the other hand, at the price of 97, no horses are withheld by sellers, whose reservation demand is therefore zero, while the demand by buyers is two. Total demand to hold at this price is 0 + 2 = 2 horses.

Table 4 shows the total demand to hold derived from the supply and demand schedule in Table 2, along with the total stock, which is, for the moment, considered as fixed. Figure 23 represents the total demand to hold and the stock.


It is clear that the rightward-sloping nature of the total demand curve is even more accentuated than that of the demand curve. For the demand schedule increases or remains the same as the price falls, while the reservation demand schedule of the sellers also tends to increase as the price falls. The total demand schedule is the result of adding the two schedules. Clearly, the reservation demand of the sellers increases as the price falls for the same reason as does the demand curve for buyers. With a lower price, the value of the purchase-good in direct use or in other and future exchanges relatively increases, and therefore the seller tends to withhold more of the good from exchange. In other words, the reservation demand curve is the obverse of the supply curve.

Another point of interest is that, at the equilibrium price of 89, the total demand to hold is eight, equal to the total stock in existence. Thus, the equilibrium price not only equates the supply and demand on the market; it also equates the stock of a good to be held with the desire of people to hold it, buyers and sellers included. The total stock is included in the foregoing diagram at a fixed figure of eight.

It is clear that the market always tends to set the price of a good so as to equate the stock with the total demand to hold the stock. Suppose that the price of a good is higher than this equilibrium price. Say that the price is 92, at which the stock is eight and the total demand to hold is four. This means four horses exist which their possessors do not want to possess. It is clear that someone must possess this stock, since all goods must be property; otherwise they would not be objects of human action. Since all the stock must at all times be possessed by someone, the fact that the stock is greater than total demand means that there is an imbalance in the economy, that some of the possessors are unhappy with their possession of the stock. They tend to lower the price in order to sell the stock, and the price falls until finally the stock is equated with the demand to hold. Conversely, suppose that the price is below equilibrium, say at 85, where 13 horses are demanded compared to a stock of eight. The bids of the eager nonpossessors for the scarce stock push up the price until it reaches equilibrium.

In cases where individuals correctly anticipate the equilibrium price, the speculative element will tend to render the total demand curve even more “elastic” and flatter. At a higher-than-equilibrium price few will want to keep the stock—the buyers will demand very little, and the sellers will be eager to dispose of the good. On the other hand, at a lower price, the demand to hold will be far greater than the stock; buyers will demand heavily, and sellers will be reluctant to sell their stock. The discrepancies between total demand and stock will be far greater, and the underbidding and overbidding will more quickly bring about the equilibrium price.

We saw above that, at the equilibrium price, the most capable (or “most urgent”) buyers made the exchanges with the most capable sellers. Here we see that the result of the exchange process is that the stock finally goes into the hands of the most capable possessors. We remember that in the sale of the eight horses, the most capable buyers, X1–X5, purchased from the most capable sellers of the good, Z1–Z5. At the conclusion of the exchange, then, the possessors are X1–X5, and the excluded sellers Z6–Z8. It is these individuals who finish by possessing the eight horses, and these are the most capable possessors. At a price of 89 barrels of fish per horse, these were the ones who preferred the horse on their value scales to 89 barrels of fish, and they acted on the basis of this preference. For five of the individuals, this meant exchanging their fish for a horse; for three it meant refusing to part with their horses for the fish. The other nine individuals on the market were the less capable possessors, and they concluded by possessing the fish instead of the horse (even if they started by possessing horses). These were the ones who ranked 89 barrels of fish above one horse on their value scale. Five of these were original possessors of horses who exchanged them for fish; four simply retained the fish without purchasing a horse.

The total demand-stock analysis is a useful twin companion to the supply-demand analysis. Each has advantages for use in different spheres. One relative defect of the total demand-stock analysis is that it does not reveal the differences between the buyers and the sellers. In considering total demand, it abstracts from actual exchanges, and therefore does not, in contrast to the supply-demand curves, determine the quantity of exchanges. It reveals only the equilibrium price, without demonstrating the equilibrium quantity exchanged. However, it focuses more sharply on the fundamental truth that price is determined solely by utility. The supply curve is reducible to a reservation demand curve and to a quantity of physical stock. The demand-stock analysis therefore shows that the supply curve is not based on some sort of “cost” that is independent of utility on individual value scales. We see that the fundamental determinants of price are the value scales of all individuals (buyers and sellers) in the market and that the physical stock simply assumes its place on these scales.28

It is clear, in these cases of direct exchange of useful goods, that even if the utility of goods for buyers or sellers is at present determined by its subjective exchange-value for the individual, the sole ultimate source of utility of each good is its direct use-value. If the major utility of a horse to its possessor is the fish or the cow that he can procure in exchange, and the major value of the latter to their possessors is the horse obtainable in exchange, etc., the ultimate determinant of the utility of each good is its direct use-value to its individual consumer.

  • 28. On the total demand-stock analysis, see Philip H. Wicksteed, The Common Sense of Political Economy and Selected Papers (London: Routledge and Kegan Paul, 1933), I, 213–38; II, 493–526, and 784–88. Also see Boulding, Economic Analysis, pp. 51–80.