4. Analysis of dentand.—The desire for a com modity is not in itself an economic demand for it. No matter how much a man may want an automobile, his desire can have no effect upon the prices or value of automobiles unless he has the necessary means of payment. Desire must be accompanied by the neces sary purchasing power before it can become economic or effective demand, or have an2,- influence in the market.
The second point to notice in connection with de mand is that it varies with the price. For example, if the price of automobiles and the cost of operation could be cut one-half, there would undoubtedly be a (Treat increase in the demand for automobiles and many more cars would be made and sold. On the other hand, if an2,- conditions cause the prices of au tomobiles and gasolene to be advanced, the tendency will be toward a weaker demand and smaller sales. Hence when we speak of the demand for any article, manifest12,- we must always have in mind a certain price, for the demand varies with the price.
There is only one way of measuring the demand for an article at any given price, and that is by the quan tity of it which is sold at that price. That shows how many people are willing to buy at such a price.
Hence it is possible for us to define demand as be ing the amount of goods which people are willing to take at a given price.
5. Analysis of word supply as com monly used includes the entire stock of goods within reach of the market, but economists use it in a stricter sense, mediaing by it only that portion of the entire stock which is actually offered for sale at a given price. The entire stock of wheat, for example, in a country might be 500,000 bushels and the price $2. If only 100,000 bushels were offered for sale, that would be the economic or effective supply at that price, and if 100,000 bushels were sold at that price, that would constitute also the economic demand.
Thus in our analysis of demand and supply, we find that at any particular time and price they are measured by the same quantity of goods.
This conclusion is not remarkable, for a man's pur chasing power depends upon the goods he possesses, plus bis credit or borrowing power which in turn de pends on his power to produce in the future. How he shall use it is deteimined by his wants. A farmer go ing to market with 10 bushels of potatoes, intending to sell them and purchase groceries with the proceeds, is increasing the supply of potatoes in the market and the demand for certain groceries. To the buyers of potatoes his load constitutes an addition to the sup ply, but to the grocer it represents a demand for cer tain groceries. Money is merely the medium by which the exchanges are effected ; the economic de mand for goods is the goods that are in the buyer's possession. In modern business the buyer always
goes to market equipped with money or credit, and this he has obtained either by the production of goods or by the performance of valuable services.
6. Potential demand and supply.—That part of the stock of an article which is not offered -for sale at a given price is sometimes called the potential sup ply. When would-be buyers of an. article are not quite satisfied with the present price and hold back for a lower price, this is referred to as the potential de mand. Dealers in any article when determining what price they may hope for naturally take into account, so far as possible, the intensity of the po tential demand and the amount of the potential sup PIY.
The great enlargement of cold storage and ware housing facilities in recent years has made the po tential supply of many commodities exceedingly im portant. The thrifty farmer is no longer compelled to market all his eggs in the spring and summer, nor all his potatoes and grain crops in the fall. In nor mal times this withholding of foodstuffs from the market, so that they are not part of the effective supply, tends, first toward the steadying of prices and, second toward the lowering of prices, for the farmer, his profits being larger and more secure, is stimulated to an increase of production.
In this book we shall use the words demand and supply in the sense given them ordinarily by busi I ness men, meaning by supply the goods in the market seeking a purchaser, and by demand the quantity of goods which people will buy at or near any given price.
7. The value equation.—Any business man knows that the price or value of an article tends to rise when ever the demand for it at the existing price is in excess of the supply offered for sale at that price; and conversely that the price of an article is lik-ely to decline whenever the supply offered at the exist ing price is greater than the demand. It is condi tions of this sort which account for the zigzagging of prices in the speculative markets. In the world's great exchanges, where the prices.of certain basic com modities are fixed, the traders give consideration to all possible circumstances that may affect the pres ent or future demand or supply of the article in which they are trading. A drought in Argentina may fore shadow a lessened supply of wheat and cause traders to bid a higher price for it, or storms in Kansas and Nebraska may threaten the corn crop and bring on a rise in the price both of corn and of pork.