Principles of Economics by Alfred Marshall (1890)

Book Five: General Relations of Demand, Supply and Value

Chapter 1, Introductory. On Markets

A business firm grows and attains great strength, and afterwards perhaps stagnates and decays; and at the turning point there is a balancing or equilibrium of the forces of life and decay: the latter part of Book IV has been chiefly occupied with such balancing of forces in the life and decay of a people, or of a method of industry or trading. And as we reach to the higher stages of our work, we shall need ever more and more to think of economic forces as resembling those which make a young man grow in strength, till he reaches his prime; after which he gradually becomes stiff and inactive, till at last he sinks to make room for other and more vigorous life. But to prepare the way for this advanced study we want first to look at a simpler balancing of forces which corresponds rather to the mechanical equilibrium of a stone hanging by an elastic string, or of a number of balls resting against one another in a basin.

We have now to examine the general relations of demand and supply; especially those which are connected with that adjustment of price, by which they are maintained in "equilibrium." This term is in common use and may be used for the present without special explanation. But there are many difficulties connected with it, which can only be handled gradually: and indeed they will occupy our attention during a great part of this Book.

Illustrations will be taken now from one class of economic problems and now from another, but the main course of the reasoning will be kept free from assumptions which specially belong to any particular class.

Thus it is not descriptive, nor does it deal constructively with real problems. But it sets out the theoretical backbone of our knowledge of the causes which govern value, and thus prepares the way for the construction which is to begin in the following Book. It aims not so much at the attainment of knowledge, as at the power to obtain and arrange knowledge with regard to two opposing sets of forces, those which impel man to economic efforts and sacrifices, and those which hold him back.

We must begin with a short and provisional account of markets: for that is needed to give precision to the ideas in this and the following Books. But the organization of markets is intimately connected both as cause and effect with money, credit, and foreign trade; a full study of it must therefore be deferred to a later volume, where it will be taken in connection with commercial and industrial fluctuations, and with combinations of producers and of merchants, of employers and employed.

2. When demand and supply are spoken of in relation to one another, it is of course necessary that the markets to which they refer should be the same. As Cournot says, "Economists understand by the term Market, not any particular market place in which things are bought and sold, but the whole of any region in which buyers and sellers are in such free intercourse with one another that the prices of the same goods tend to equality easily and quickly." (1) Or again as Jevons says: — "Originally a market was a public place in a town where provisions and other objects were exposed for sale; but the word has been generalized, so as to mean any body of persons who are in intimate business relations and carry on extensive transactions in any commodity. A great city may contain as many markets as there are important branches of trade, and these markets may or may not be localized. The central point of a market is the public exchange, mart or auction rooms, where the traders agree to meet and transact business. In London the Stock Market, the Corn Market, the Coal Market, the Sugar Market, and many others are distinctly localized; in Manchester the Cotton Market, the Cotton Waste Market, and others. But this distinction of locality is not necessary. The traders may be spread over a whole town, or region of country, and vet make a market, if they are, by means of fairs, meetings, published price lists, the post-office or otherwise, in close communication with each other." (2)

Thus the more nearly perfect a market is, the stronger is the tendency for the same price to be paid for the same thing at the same time in all parts of the market: but of course if the market is large, allowance must be made for the expense of delivering the goods to different purchasers; each of whom must be supposed to pay in addition to the market price a special charge on account of delivery. (3)

3. In applying economic reasonings in practice it is often difficult to ascertain how far the movements of supply and demand in any one place are influenced by those in another. It is clear that the general tendency of the telegraph, the printing-press and steam traffic is to extend the area over which such influences act and to increase their force. The whole Western World may, in a sense, be regarded as one market for many kinds of stock exchange securities, for the more valuable metals, and to a less extent for wool and cotton and even wheat; proper allowance being made for expenses of transport, in which may be included taxes levied by any customs houses through which the goods have to pass. For in all these cases the expenses of transport, including customs duties, are not sufficient to prevent buyers from all parts of the Western World from competing with one another for the same supplies.

There are many special causes which may widen or narrow the market of any particular commodity: but nearly all those things for which there is a very wide market are in universal demand, and capable of being easily and exactly described. Thus for instance cotton, wheat, and iron satisfy wants that are urgent and nearly universal. They can be easily described, so that they can be bought and sold by persons at a distance from one another and at a distance also from the commodities. If necessary, samples can be taken of them which are truly representative: and they can even be "graded," as is the actual practice with regard to grain in America, by an independent authority; so that the purchaser may be secure that what he buys will come up to a given standard, though he has never seen a sample of the goods which he is buying and perhaps would not be able himself to form an opinion on it if he did. (4)

Commodities for which there is a very wide market must also be such as will bear a long carriage: they must be somewhat durable, and their value must be considerable in proportion to their bulk. A thing which is so bulky that its price is necessarily raised very much when it is sold far away from the place in which it is produced, must as a rule have a narrow market. The market for common bricks for instance is practically confined to the near neighbourhood of the kilns in which they are made: they can scarcely ever bear a long carriage by land to a district which has any kilns of its own. But bricks of certain exceptional kinds have markets extending over a great part of England.

4. Let us then consider more closely the markets for things which satisfy in an exceptional way these conditions of being in general demand, cognizable and portable. They are, as we have said, stock exchange securities and the more valuable metals.

Any one share or bond of a public company, or any bond of a government is of exactly the same value as any other of the same issue: it can make no difference to any purchaser which of the two he buys. Some securities, principally those of comparatively small mining, shipping, and other companies, require local knowledge, and are not very easily dealt in except on the stock exchanges of provincial towns in their immediate neighbourhood. But the whole of England is one market for the shares and bonds of a large English railway. In ordinary times a dealer will sell, say, Midland Railway shares, even if he has not them himself; because he knows they are always coming into the market, and he is sure to be able to buy them.

But the strongest case of all is that of securities which are called "international," because they are in request in every part of the globe. They are the bonds of the chief governments, and of very large public companies such as those of the Suez Canal and the New York Central Railway. For bonds of this class the telegraph keeps prices at almost exactly the same level in all the stock exchanges of the world. If the price of one of them rises in New York or in Paris, in London or in Berlin, the mere news of the rise tends to cause a rise in other markets; and if for any reason the rise is delayed, that particular class of bonds is likely soon to be offered for sale in the high priced market under telegraphic orders from the other markets, while dealers in the first market will be making telegraphic purchases in other markets. These sales on the one hand, and purchases on the other, strengthen the tendency which the price has to seek the same level everywhere; and unless some of the markets are in an abnormal condition, the tendency soon becomes irresistible.

On the stock exchange also a dealer can generally make sure of selling at nearly the same price as that at which he buys; and he is often willing to buy first class stocks at a half, or a quarter, or an eighth, or in some cases even a sixteenth per cent less than he offers in the same breath to sell them at. If there are two securities equally good, but one of them belongs to a large issue of bonds, and the other to a small issue by the same government, so that the first is constantly coming on the market, and the latter but seldom, then the dealers will on this account alone require a larger margin between their selling price and their buying price in the latter case than in the former. (5) This illustrates well the great law, that the larger the market for a commodity the smaller generally are the fluctuations in its price, and the lower is the percentage on the turnover which dealers charge for doing business in it.

Stock exchanges then are the pattern on which markets have been, and are being formed for dealing in many kinds of produce which can be easily and exactly described, are portable and in general demand. The material commodities however which possess these qualities in the highest degree are gold and silver. For that very reason they have been chosen by common consent for use as money, to represent the value of other things: the world market for them is most highly organized, and will be found to offer many subtle illustrations of the actions of the laws which we are now discussing.

5. At the opposite extremity to international stock exchange securities and the more valuable metals are, firstly, things which must be made to order to suit particular individuals, such as well-fitting clothes; and, secondly, perishable and bulky goods, such as fresh vegetables, which can seldom be profitably carried long distances. The first can scarcely be said to have a wholesale market at all; the conditions by which their price is determined are those of retail buying and selling, and the study of them may be postponed. (6)

There are indeed wholesale markets for the second class, but they are confined within narrow boundaries; we may find our typical instance in the sale of the commoner kinds of vegetables in a country town. The market-gardeners in the neighbourhood have probably to arrange for the sale of their vegetables to the townspeople with but little external interference on either side. There may be some check to extreme prices by the power on the one side of selling, and on the other of buying elsewhere; but under ordinary circumstances the check is inoperative, and it may happen that the dealers in such a case are able to combine, and thus fix an artificial monopoly price; that is, a price determined with little direct reference to cost of production, but chiefly by a consideration of what the market will bear.

On the other hand, it may happen that some of the market-gardeners are almost equally near a second country town, and send their vegetables now to one and now to the other; and some people who occasionally buy in the first town may have equally good access to the second. The least variation in price will lead them to prefer the better market; and thus make the bargainings in the two towns to some extent mutually dependent. It may happen that this second town is in close communication with London or some other central market, so that its prices are controlled by the prices in the central market; and in that case prices in our first town also must move to a considerable extent in harmony with them. As news passes from mouth to mouth till a rumour spreads far away from its forgotten sources, so even the most secluded market is liable to be influenced by changes of which those in the market have no direct cognizance, changes that have had their origin far away and have spread gradually from market to market.

Thus at the one extreme are world markets in which competition acts directly from all parts of the globe; and at the other those secluded markets in which all direct competition from afar is shut out, though indirect and transmitted competition may make itself felt even in these; and about midway between these extremes lie the great majority of the markets which the economist and the business man have to study.

6. Again, markets vary with regard to the period of time which is allowed to the forces of demand and supply to bring themselves into equilibrium with one another, as well as with regard to the area over which they extend. And this element of Time requires more careful attention just now than does that of Space. For the nature of the equilibrium itself, and that of the causes by which it is determined, depend on the length of the period over which the market is taken to extend. We shall find that if the period is short, the supply is limited to the stores which happen to be at hand: if the period is longer, the supply will be influenced, more or less, by the cost of producing the commodity in question; and if the period is very long, this cost will in its turn be influenced, more or less, by the cost of producing the labour and the material things required for producing the commodity. These three classes of course merge into one another by imperceptible degrees. We will begin with the first class; and consider in the next chapter those temporary equilibria of demand and supply, in which "supply" means in effect merely the stock available at the time for sale in the market; so that it cannot be directly influenced by the cost of production.


1. Recherches sur les Principes Mathématiques de la Théorie des Richesses, ch. IV. See also above III, IV, section 7.

2. Theory of Political Economy, ch. IV.

3. Thus it is common to see the prices of bulky goods quoted as delivered "free on board" (f.o.b.) any vessel in a certain port, each purchaser having to make his own reckoning for bringing the goods home.

4. Thus the managers of a public or private "elevator," receive grain from a farmer, divide it into different grades, and return to him certificates for as many bushels of each grade as he has delivered. His grain is then mixed with those of other farmers; his certificates are likely to change hands several times before they reach a purchaser who demands that the grain shall be actually delivered to him; and little or none of what that purchaser receives may have come from the farm of the original recipient of the certificate.

5. In the case of shares of very small and little known companies, the difference between the price at which a dealer is willing to buy and that at which he will sell may amount to from five per cent. or more of the selling value. If he buys, he may have to carry this security a long time before he meets with any one who comes to take it from him, and meanwhile it may fall in value: while if he undertakes to deliver a security which he has not himself got and which does not come on the market every day, he may be unable to complete his contract without much trouble and expense.

6. A man may not trouble himself much about small retail purchases: he may give half-a-crown for a packet of paper in one shop which he could have got for two shillings in another. But it is otherwise with wholesale prices. A manufacturer cannot sell a ream of paper for six shillings while his neighbour is selling it at five. For those whose business it is to deal in paper know almost exactly the lowest price at which it can be bought, and will not pay more than this. The manufacturer has to sell at about the market price, that is at about the price at which other manufacturers are selling at the same time.