The results ob tained by taking account only of the supply of and demand for a particular commodity in relation to its price are no more than a first approximation to the truth. In isolating, for reasons of prac tical convenience, the factors which determine the price of any one commodity, taken by itself, economists are accustomed to assume that the value of money, to both buyers and sellers, is constant. This means that no account is taken of the way in which changes in the amount of money which consumers expend for the one commodity will affect their ability to buy other com modities, or the way in which an increase of the production of the one commodity will affect the ability of producers to supply other commodities. There are many instances of joint or com plementary demand, as for fruit and sugar or for automobiles and petrol, and of joint supply, as of mutton and wool, of coal-gas and coke, of cotton and cottonseed. The general rule is, however, that consumers' outlays for any one commodity can be increased only by reducing the amounts which they expend for other com modities, and that more of any one commodity can be produced only by displacing other possible uses of productive resources. This general rule is not inconsistent with the fact that, making abstraction of the use of money as a medium of exchange, the supply of any one commodity is an expression of the demand of its producers for other commodities and services.
There is a sense in which supply and demand, seen in the aggregate, are merely different aspects of a single situation. It is for this reason that some of the older economists held that general overproduction is impossible—a theorem which, though not really erroneous, has proved to be misleading. The effective demand of the producers of one commodity for other products depends not only upon how much they produce, but also upon the relative demand of other producers for that particular commod ity as compared with other products. Only so far as the demand for a particular commodity is elastic is it true in any significant sense that an increase of its supply is an effective increase of de mand for other commodities. There may be and often are mal adjustments of supply and demand. Furthermore, production in general may at one time outrun and at another time fail to keep pace with the expansion of money incomes. In either event there will be general fluctuations of prices, attended, as experience shows, by changes in the relative levels of the prices of different classes of goods and services.
The general form of the relations of supply, demand, and price which obtain when all products are taken into account can be depicted mathematically in systems of equations, and thus the general character of the whole interdependent structure of prices can be laid bare. But empirical (statistical) studies of the rela
tions between the fluctuations of the production of various staple commodities and fluctuations of their prices have shown that the first approximation previously referred to is generally a useful and often a surprisingly accurate approximation. It is necessary, of course, to allow for the effects of contemporaneous changes of the general purchasing power of money, and it is sometimes necessary to allow also for the effects of other important disturb ing circumstances. But it is not necessary to take account of complications of a secondary order of importance in order to obtain "empirical laws of demand" for such commodities as wheat, cotton, sugar, beef and potatoes which appear to be fairly reliable, at least over periods of some years.
The rule that supply and demand may be regarded as functions of
dependent upon price must be so interpreted, of course, as to allow for the circumstance that the supply of something is fixed and is in no way responsive to an increase of price. As the production of other goods increases the prices of these non-reproducible forms of wealth must inevitably increase, unless the demand for them falls off. If these non reproducible things are necessary instruments in the production of other goods, as land is, then other goods will be produced under conditions of diminishing returns, unless this disadvantage can be offset by improvements in productive processes or by cheaper supplies of other necessary productive instruments. For some purposes it is convenient to assume that the aggregate supply of reproducible goods, or of reproducible productive goods, is fixed for the time being. The problems of supply and demand then have to do merely with the apportioning, by exchange, of an exist ing stock of goods, or with the assigning of productive instru ments to the most important of their various possible uses. Thus the increase of the supply of labour in a given industry or a given locality may be taken to depend largely upon a possible transfer of workers from other industries or other localities. Whether labour in the aggregate may be said to have a supply price (i.e., to be responsive in the long run to an increase of wages) is a question to which the Malthusian theory of population gave a more nearly unqualified affirmative answer than would be sup ported by the present opinion of scholars. (See also DEMAND,