At any given time there are in any market a num ber of men more or less anxious to buy a certain com modity and others vrtho wish to sell. If the sellers are asking too high a price, certain buyers hold off and all the stock cannot be sold. On the other hand, if they should offer their goods at too low a price, the demand would exceed the supply, certain buyers would get all they wanted and others would be dis appointed. • Assuming that the buyers and sellers are all keenly competing with one another, each anxious to get all possible advantage otit of the market, it is evident that the sellers, even tho they enter into no agree ment with one another, will endeavor to -put the price at the highest possible figure at which all their supply can be sold. So we may say in general that value or price is such a. ratio of exchange as tends to establish an equation between demand and sup ply. The reader will not understand this definition unless he gives careful consideration to the fact that changes in the price or value of a commodity tend to cause changes in the demand and supply. In the chapter on Value we shall discuss this subject from other points of view.
8. Agricultural law of diminishing of the most important laws in economics was borrowed from the science of agriculture and is known as the law of diminishing returns. Most economists have treated it mainly with reference to its bearing upon the profits of agriculture, but it applies also to other industries.
The law as it applies to.land may be stated as fol lows: In the cultivation of a piece of land, after a certain point is reached the application of additional labor and capital fails to cause a proportionate in crease in the yield.
This law states a truth that the experience of every farmer confirms. On a given field a farmer knows how many loads "of fertilizer and how many men can be employed to the greatest advantage. He knows that if he puts on additional loads of fertilizer or em ploys an additional man in the cultivation of the field, altho- the total yield may be increased, the re turn per unit of capital and labor will be less. Sup pose that the land when cultivated by two men and enriched by ten loads of fertilizer yields 1,000 bushels of wheat. The next season let him increase the use of capital and labor by 50 per cent, that is, apply 15 loads of fertilizer and keep three men at work in the field. If he obtains less than 1500 bushels of' wheat it is manifest that the point of diminishing re turns has been reached and that his wheat costs him more per bushel the second year than in the first.
This law is important because of its bearing upon the cost of production. As population increases farmers must do one of two things: (1) They must bring poorer or more distant lands into cultivation; (2) the land already- tilled must be cultivated more intensively:, by which is meant that more labor -and capital must be applied. The result in either case
is the same, namely, higher costs of production and hence higher prices of foodstuffs in the markets.
The law is manifestly applicable not only to agri culture, but to all extractive industries, such as min ing and lumbering. As the demand for ores and lum ber increases, mines must be worked to greater depths and lumber must be brought from forests more re znote, all of which means higher costs of production and a tendency toward higher prices.
9. General law of diminishing law is applicable to all forms of industry and may be stated as follows: In the development of any indus try there is a point at which the returns upon capital and labor invested are at a maximum; after this point is reached, the application of further labor and capital does not cause a proportionate increase in the value of the return.
Note the difference between the agricultural law and this more general law. In agriculture there is a decline of product per unit of capital and labor ; in industry in general there is a decline, not necessar ily of product, but in the value of the product. This difference is due to the fact that the supply of land is limited, whereas in industry the number of facto ries may be indefinitely increased.
If we consider the producing power of a single fac tory, the law applies to it exactly as to a piece of land. In ft, given building only a certain number of machines and men can be employed to the greatest advantage. If more are introduced, the output per man and ma chine declines, altho the total product may be in creased. Hence it follows that in indust7 in general, after a certain point of development has been reached, more men and capital cannot be employed without a certain decline in the output per capital and per man unless additional space for their employment has been provided. Since additional space for manufac turing industries can easily be found, an increasing demand for manufactured articles does not always lead to higher costs of production and higher prices. On the contrary, it often lowers costs because of the economies made possible by large-scale production.
But in any industry, if the demand for its product remain unchanged, then after a certain period in its development has been reached the employment of ad ditional men and machines will not yield a propor tionate increase in the value of the product, for the supply of the product on the market would be in creased and the value would tend downward as a re sult. At any given time in any country only a defi nite number of men and a definite amount of capital can be employed to the greatest advantage in any in dustry. .