Imagine, if you will, a community without a government—a stateless society—in which no group has the legitimate power to coerce other individuals or interfere into peaceful, voluntary exchange. In other words, imagine a world without taxation, without conscription, without government regulation of prices, rents and wages, without government regulation of production and trade, without government redistribution of income and wealth, and so on.

As far as economics is concerned, the Bible could just as well have begun with the following words: “In the beginning there was scarcity. . . .” And there still is “scarcity”; its existence is a fundamental premise of economics, the belief that all of human existence and activity is characterized by this basic condition of scarcity.

Let us take a long look back into history and quote from what is probably the first astute analysis of specialization and division of labor (DOL). In his book called Cyropaedia, written by the ancient Greek writer Xenophon (430-355 B.C.), we find the following illuminating passage:

Consumption is the act of satisfying a human want. As such, therefore, it is the most prevalent human action. Equally significant, however, is the fact that in the natural scheme of things consumption is the ultimate purpose of production. Human energies become “productive” to the extent that they are to be directed towards producing those things that are directly and indirectly useful to consumers. Only leisure and air are directly obtainable without any effort.

Preceding chapters have been preoccupied with only one set of implications of scarcity—the need for man and society to engage in production for the provision of goods capable of satisfying wants. The relevant contexts were the direct-use and market modes of production, extending from Robinson Crusoe at one extreme to the complex social division of labor at the other extreme.

The market place is a social-economic context in which suppliers and demanders face each other in repeated instances of exchange—actual and potential. The rates at which they exchange their goods and services and money constitute the “prices” of the market. As we shall see in Chapter VIII, it is the free and spontaneous interplay of demand and supply forces which determines the prices that tend to prevail in the market.

After all is said and done, the law of demand is not enough. The reason: demand schedules come in a variety of slopes or price-elasticity—which makes all the difference in the world for the firm. Hence this chapter.

Prices, prices everywhere—indeed, prices are the most widespread aspect of the market place. And the market place is the preeminent theater of exchange transactions in our lives—the stage upon which we offer each other the services of our labor power, savings, or other wealth, in order to earn the income with which to buy the things we want. No wonder it is such a focal point of human action.

This chapter is mostly about profits. Wages and other incomes are briefly touched upon, but the spotlight is on profits. The importance of profits should be clear: the firm which earns profits is also the prime generator of other incomes, including wages and salaries, as we saw in Chapter IV. In that chapter we also saw how profits can be increased by improved technology and cost reduction. In Chapter VIII we saw how changing market conditions affect selling prices and profits.

Consumers’ sovereignty may be the central political-economic issue facing people in modern society. The question of consumers’ sovereignty is not merely an empirical one—a question of whether the consumer is actually “king” in the market place, or to what extent the consumer exercizes any “sovereignty.” The more important question is the normative one: Should the consumer be “sovereign” in the market?