We would naturally expect the supply curve to be just the inverse of the demand curve, rising with a rising price and descending with a falling one, so that by the time the price is zero supply is nil, whereas the demand is infinite.[1125]
But it is not quite correct to regard it as merely the inverse of the demand curve. A supply curve is really a much more complicated affair, because supply itself depends upon cost of production, and there are some kinds of production—agriculture, for example—where the cost of production increases much more rapidly than the quantity produced. In industry, on the other hand, the cost of production decreases as the quantity produced increases.
Mathematical political economy, not content with seeking relations of mutual dependence between isolated facts, claims to be able to embrace the whole field within its comprehensive formulæ. Everything seems to be in a state of equilibrium, and any attempt to upset it is immediately corrected by a tendency to re-establish it.[1126] To determine the conditions of equilibrium is the one object of pure economics.
The most remarkable attempt at systematisation of this kind was made by Professor Walras, who endeavoured to bring every aspect of the economic world within his formula, a task almost as formidable as that attempted by Laplace in his Mécanique céleste.[1127]
Let us imagine the whole of society included within one single room, say the London Stock Exchange, which is full of the tumult of those who have come to buy and sell, and who keep shouting their prices. In the centre, occupying the place usually taken up by the market, sits the entrepreneur, a merchant or manufacturer or an agriculturist, as the case may be, who performs a double function.
On the one hand he buys from producers, whether rural or urban, landlords, capitalists, or workers, what Walras calls their “productive services,” that is, the fertility of their lands, the productivity of their capital or their labour force, and by paying them the price fixed by the laws of exchange he determines the revenue of each; to the proprietor he pays a rent, to the capitalist interest, to the workman wages. But how is that price determined? Just as at the Exchange all values whatsoever are determined by the law of demand and supply, so the entrepreneur demands so many services at such and such a price and the capitalist or workman offers him so many at that price, and the price will rise or fall until the quantity of services offered is equal to the quantity demanded.
The entrepreneur on his side disposes of the manufactured goods fashioned in his factory or the agricultural products grown on his farm to those very same persons, who have merely changed their clothes and become consumers. As a matter of fact the proprietors, capitalists, and workers who formerly figured as the vendors of services now reappear as the buyers of goods. And who else did we expect the buyers to be? Who else could they be?
And in this market the prices of products are determined in just the same fashion as we have outlined above.