The hungry boy looking longingly at the sweetmeats in the confectioner's window, represents mere desire; not until the kind-hearted gentleman gives him a nickel does he represent demand for sweetmeats, and then only in case the sweets are the nickel's worth that he most desires, and not then unless the confectioner is willing to part with the coveted article for a nickel. Demand is actual, desire for a sale-good is effective, only in reference to a certain price, the quantity of the goods which the seller will take for it. We may speak of the in tensity of desire, but should say rather the extent (or amount, the number of units) of demand.
§ 6. Supply. Supply is the correlative of demand in the phrase, demand and supply ; it is the amount of sale-goods which sellers are actually ready to trade at a given price. Supply implies the existence of desire as surely as does de mand. Indeed, supply may be defined as desire for a certain quantity of price-goods, at a certain ratio of exchange, united with the power to give sale-goods for them. Supply should not be confused with the stock in possession. The two may differ greatly, for at a given price a person may choose to offer for trade little or none at all of a good, even tho he has a considerable stock of it on hand. Demand and supply vary as the price changes, but in opposite directions. Demand varies inversely with price (rises as price falls), and supply varies directly with price (rises as price rises).
§ 7. Limits of advantage in isolated barter. In barter the trade can take place only within certain limits of price per mitting each party to gain somewhat by the choice. The num ber of units of sale-goods compared with those of the price (each in some specific unit, as pound, yard, gallon, etc.), ex presses the ratio of trade (or ratio-of-exchange). When two farmers "trade even," a horse for a cow, either the horse or the cow may be looked upon as the price of the other good, and the ratio of exchange is 1 to 1. But the fact that in trade one thing is equal to the other does not mean that in either trader's opinion the values of the two things are equal. In deed the very motive of the trade to each party is that he may get what is to him a more valuable for a less valuable object. To even up a trade something may be given "to boot" and one thing be traded for a group of things, as a gun for a boat and a set of fishing tackle, or onerabbit for a lot of 25 fish!' It must nearly always be the case that there are several ratios of exchange at which a trader has more or less of a motive to trade.
Where there are only two (or a small number of) traders there is a considerable range for bargaining, or higgling. For example, the owner of the rabbit might be willing to take 20 fish rather than not to trade, and the owner of the fish might rather give 30 fish than go without the rabbit. It is not at
all certain that in such a case the trade will be at a ratio arithmetically midway between the extremes. Higgling is il lustrated by the old-time American horse trade, in which so * Boot means amends, compensation, from the same root as better, best, thus to make good, to even up a trade.
much depends on "bluff "; in such cases it is as important to be able to judge character as to judge horses, for the bar gain will be concluded at a ratio of price to sale-good which exactly balances the hope of gain and fear of loss by one of the parties. This same margin for higgling appears in most exchanges between two somewhat isolated traders, even in highly developed business.
The effect that duplicate and additional units of a good have on valuation (principle of diminishing gratification) is the most frequent cause of barter. The owner, in accordance with the principle of substitution, seeks to trade some of his stock of a good (those units which correspond to less intense, direct uses) for goods which he lacks entirely or values more highly. A hunter with a large pack will be glad to trade a part of his furs for a part of the farmer's grain and fruit. He thus gives up the satisfaction of his marginal, less intense desires for furs to gratify his more intense desires for grain and fruit. But (having meat to eat) he would not, at any price, trade for food all the furs he has. Thus, when goods are turned to their trade-uses, new levels of actual valuations for each of the two kinds of goods result in place of those existing before the trade.
It should be clear from this chapter that any true trade must be mutual and voluntary. It thus differs from gift making, stealing, extortion, taxation, etc. True trade is of mutual advantage to the parties, at least is believed to be so at the moment. It is this which makes trade rational. It is a mode of substituting more desirable for less desirable goods.
A popular idea very difficult to uproot is that if one party to a trade gains the other must lose. This idea was generally held in ancient times and in the Middle Ages, and seems to have been connected with the notion that value is something fixed in a good and unchangeable. This seems to have been one reason for the poor opinion held of merchants, tho the frequency of fraud in trade with strangers strengthened this opinion. But if goods having a small value may be given a higher value by being traded, trade and the work of merchants, peddlers, and carriers of all sorts, may be a value-increasing process.