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Evolution and Refinement of the Concept of Supply and Demand from Cournot to Marshall Ray McDermott Table of Contents Page Introduction 1 John Stuart Mill 2 Augustin Cournot 5 J. H. von Thunen 7 Hermann Heinrich Gossen 8 Fleeming Jenkin 10 William Stanley Jevons 13 Carl Menger 19 Leon Walras 21 Aspects of Marginal Theory as set by Jevons, Menger and Walras 28 Rudolf Auspitz and Richard Lieben 47 Alfred Marshall 52 Conclusion 66 Bibliography 67 ALUMNI MEMORIAL LIBRARY Creighton University Omaha; Nebraika 65178 fc v 385843 “ *** '••v.i-fii. Evolution and Refinement of the Concept of Supply and Demand from Cournot to Marshall The law of supply and demand can be restated in mathematical language. Fleeming Jenkin did this. As one looks at the correspondence between the economists of an eighty year period (Cournot to Marshall), thinking can be clarified on the discussion of supply and demand. Relationships are shown between these economists. There are similar­ ities as well as differences in their thinking. Disagreements on terminology pertaining to utility theory is evident between Jevons, Walras, and Menger. Priority on thoughts about utility was claimed and disputed between Jevons and Walras. Marshall was annoyed by Jevons* theory. Marshall, Walras, and Mill were all directed by their fathers in the classics. Lecturing at various universities was common for Jevons, Marshall, Walras, and Menger. Some however were not trained economists. Examples of these were Jenkin, Cournot, and von Thunen. Jevons, Menger, and Walras were the founders of the Marginal Utility School. The economists are not discussed according to the chronological time in which they lived. Instead, they are discussed according to anticipated parts of marginal doctrine. Within a period of four years, Walras, Menger, and Jevons reached similar conclusions while working independently. Marshall refined previous definitions and laws of elasticity, supply and demand. 1 John Stuart Mill Mill's contribution to the theory of international trade was a major extension of Ricardian theory. An important question, how were the bene­ fits of international trade divided among trading nations, had been left unanswered by Ricardo. What was the mechanism which distributed the gains? Mill's answer emerged in two country terms, dependent upon intensely simpli­ fied assumptions. Such a state of affairs is not very different today. As an example, let us suppose that Scotland and Ireland are the two coun­ tries in question, trading in only two commodities, cloth and wool. Also in supposition, the output in each country proceeds at constant real cost. Finally, we will suppose in Ireland, twenty yards of cloth cost as much to produce as thirty yards of wool. In Scotland, twenty yards of cloth cost as much to produce as forty yards of wool. From this example, the principle of comparative advantage makes it unmistakable that Ireland would import wool and export cloth. However, the real prices at which the transactions take place deter­ mine the distribution of benefit. Mill began by setting out the limits of these prices. Exchange would take place under two circumstances. First, if, at one limit, twenty yards of cloth were exchanged for thirty yards of wool. Secondly, if, at another limit, twenty yards of cloth were exchanged for forty yards of wool. Quoting Mill: "What if the actual exchange was twenty yards of cloth for thirty-four yards of wool?" The result produced might be from the relative strength of the demand for cloth and wool in the two countries. 2 A change in any of the conditions of the problem alters its conclusion. According to Mill, a technical improvement in Irish wool manufacture reduces its price one-third. The Scottish demand for wool would increase and its price, in terms of cloth, decreases. What would transpire to the Irish demand for wool after Scotland lowered its offering price? Mill's answer employed the comparatively modem notion of elasticity of demand. If Ireland's demand for wool was increased by the same percentage as its price decreased (an elasticity of unity) then, at the new equilibrium, twenty yards of Irish cloth would exchange for fifty-one yards of Scottish wool. If elasticity were less than unity, equilibrium would occur when twenty yards of wool were exchanged for more than fifty-one yards, but less than sixty yards of wool. Lastly, if demand elasticity were more than unity, the equilibrium solution demands that twenty yards of cloth be exchanged for less than fifty-one but more than forty-five yards of wool. Mill's encumbering arithmetic example determines trade equilibrium under highly simplified conditions it assumes. From this analysis, Mill concludes that trade equilibrium between two countries finds each one exporting just enough to cover its imports. This was the "equation of international demand" or the "law of international values." It was a model for Alfred Marshall's sumptuous geometry and a jumping off place for twentieth century theorists. Marshall and Edgeworth developed methods which, obsolete by now, gave satis­ faction to many in the 1890's. Edgeworth and others accused Mill of believing that a country's total gain from trade always increased or decreased as its gain per unit of exports. 3 The state of supply and demand in the international market between two countries, in our example, Scotland and Ireland, could be explained by the following graph:* Y x clo'fK The curve 01 shows that in exchange for any amount of wool (Oy), Ireland is prepared to supply the quantity of cloth yp (equal to Ox). In exchange for the quantity of Ox of cloth, Ireland demands xp (equal to Oy) of wool. The curve OS is similarly related to Scotland's supply and demand. The position of equilibrium is determined by the inter­ section of 01 and OS. 1F. Y. Edgeworth, Papers Relating to Political Economy (New York: Burt Franklin, 1925), p. 292. 4 Augustin Cournot Augustin Cournot is one of the anticipators of marginal analysis. He is given credit for defining supply and demand as schedules. He assumes that the demand for an article depends on the quantity of it consumed annually. The form of the demand curve depends on the kind of utility of the article, on the nature of the services it can render or the enjoyments it can procure, on the habits and customs of the people, on the average wealth, and on the scale on which wealth is distributed.^ Y The simplest case of exchange is where there are two large groups of uncombined individuals dealing respectively in two commodities, eg., c o m and money. To represent the play of demand and supply, let any abscissa OX represent a certain price, and let the quantity of commodity demanded ^Augustin Cournot, The Mathematical Principles of the Theory of Wealth (Illinois: Richard D. Irwin, Inc., 1963), p. 38. 5 at that price be Xp. The locus of p may be called the demand curve. Simi­ larly, Xp represents the quantity offered at any price, Ox; and the locus of q is called the supply curve. The price Oa, at which the demand is just equalled by the supply, is determined by the intersection of these curves.^ Although writers had preceded him in the application of mathematics to Political Economy, he was the first to have substantial results. Of the early writers, he exerts today a significant influence on economic thought. Later writers, including Walras, have demonstrated how to arrive at the demand curve used by Cournot from a system of individual demand curves. In doing this, they have not surpassed Cournot but have laid bare the foun­ dations on which he built. 3 F. Y. Edgeworth, Papers Relating to Political Economy (New York: Burt Franklin, 1925), p. 291. 6 Je H. Von Thunen J. H. Von Thunen furnished proff of the Law of Diminishing Returns. In Economics Principles and Problems by Anatol Murad, the Law of Diminishing Returns is defined as "where successive quantities, or units, of labor and capital are applied to a given quantity of land, a point will be reached beyond which further additions of labor and capital will yield less than ii proportional increments of output. Von Thunen proposed a large city situated at the center of a productive plain, not crossed by a river or canal. Land was uniform and plentiful. Labor was uniform but not so plentiful that any of it could be had for nothing. Capital was also scarce. With labor and capital used more widely, recognizing the presence of diminishing returns, Von Thunen perceived that the utilization of these factors would not be carried beyond the point at which the cost of a unit was barely covered by the increase it made to the product. The application of Marginal Principles by Von Thunen can be explained in regard to wages. A certain point is reached where more workers yield an ever smaller return to the total product; so that the last worker hired yields an increase just equal to the pay which he receives. This then is a wage which sets the pace for all those employed. It is unlikely that the employer will pay disparate pay for the same kind of work. 7 Hermann Heinrich Gossen H . H. Gossen advanced two original laws. They have become part of demand theory. His third law is derived from laws one and two. The laws are as follows: Law I — From successive helpings of the same commodity, in a short time span, the satisfaction decreases as the amount in the hands of the consumer increases. Law II is defined as a state of personal stability, satieties from the final units of commodities, comparable to the prices of the commodities.

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