Principles of Economics

The services of the flour mill and the oven are joined together in the ultimate product, bread: the demand for them is therefore called a joint demand. Again, hops and malt are complementary to one another; and are joined together in the common destination of ale: and so on. Thus the demand for each of several complementary things is derived from the services which they
jointly render in the production of some ultimate product, as for instance a loaf of bread, a cask of ale. In other words there is a
joint demand for the services which any of these things render in helping to produce a thing which satisfies wants directly and for which there is therefore a direct demand: the direct demand for the finished product is in effect split up into many derived demands for the things used in producing it
*46.

To take another illustration, the direct demand for houses gives rise to a joint demand for the labour of all the various building trades, and for bricks, stone, wood, etc. which are factors of production of building work of all kinds, or as we may say for shortness, of new houses. The demand for any one of these, as for instance the labour of plasterers, is only an indirect or derived demand.

Let us pursue this last illustration with reference to a class of events that are of frequent occurrence in the labour market; the period over which the disturbance extends being short, and the causes of which we have to take account as readjusting demand and supply being only such as are able to operate within that short period.

This case has important practical bearings, which give it a special claim on our attention; but we should notice that, referring as it does to short periods, it is an exception to our general rule of selecting illustrations in this and the neighbouring chapters from cases in which there is time enough for the full long-period action of the forces of supply to be developed.

Let us then suppose that the supply and demand for building being in equilibrium, there is a strike on the part of one group of workers, say the plasterers, or that there is some other disturbance to the supply of plasterers’ labour. In order to isolate and make a separate study of the demand for that factor, we suppose firstly that the general conditions of the demand for new houses remain unchanged (that is, that the demand schedule for new houses remains valid); and secondly we assume that there is no change in the general conditions of supply of the other factors, two of which are of course the business faculties and the business organizations of the master builders; (that is, we assume that their lists of supply prices also remain valid). Then a temporary check to the supply of plasterers’ labour will cause a proportionate check to the amount of building: the demand price for the diminished number of houses will be a little higher than before; and the supply prices for the other factors of production will not be greater than before
*47. Thus new houses can now be sold at prices which exceed by a good margin the sum of the prices at which these other requisites for the production of houses can be bought; and that margin gives the limit to the possible rise of the price that will be offered for plasterers’ labour, on the supposition that plasterers’ labour is indispensable. The different amounts of this margin, corresponding to different checks to the supply of plasterers’ labour, are governed by the general rule that:— The price that will be offered for any thing used in producing a commodity is, for each separate amount for the commodity, limited by the excess of the price at which that amount of the commodity can find purchasers, over the sum of the prices at which the corresponding supplies of the other things needed for making it will be forthcoming.

To use technical terms, the demand schedule for any factor of production of a commodity can be
derived from that for the commodity by subtracting from the demand price of each separate amount of the commodity the sum of the supply prices for corresponding amounts of the other factors
*48.

§ 2. When however we come to apply this theory to the actual conditions of life, it will be important to remember that if the supply of one factor is disturbed, the supply of others is likely to be disturbed also. In particular, when the factor of which the supply is disturbed is one class of labour, as that of the plasterers, the employers’ earnings generally act as a buffer. That is to say, the loss falls in the first instance on them; but by discharging some of their workmen and lowering the wages of others, they ultimately distribute a great part of it among the other factors of production. The details of the process by which this is effected are various, and depend on the action of trade combinations, on the higgling and bargaining of the market, and on other causes with which we are not just at present concerned.

Let us inquire what are the conditions, under which a check to the supply of a thing that is wanted not for direct use, but as a factor of production of some commodity, may cause a very great rise in its price. The first condition is that the factor itself should be essential, or nearly essential to the production of the commodity, no good substitute being available at a moderate price.

The second condition is that the commodity in the production of which it is a necessary factor, should be one for which the demand is stiff and inelastic; so that a check to its supply will cause consumers to offer a much increased price for it rather than go without it; and this of course includes the condition that no good substitutes for the commodity are available at a price but little higher than its equilibrium price. If the check to house building raises the price of houses very much, builders, anxious to secure the exceptional profits, will bid against one another for such plasterers’ labour as there is in the market
*49.

The third condition is that only a small part of the expenses of production of the commodity should consist of the price of this factor. Since the plasterer’s wages are but a small part of the total expenses of building a house, a rise of even 50 per cent. in them would add but a very small percentage to the expenses of production of a house and would check demand but little
*50.

The fourth condition is that even a small check to the amount demanded should cause a considerable fall in the supply prices of other factors of production; as that will increase the margin available for paying a high price for this one
*51. If, for instance, bricklayers and other classes of workmen, or the employers themselves cannot easily find other things to do, and cannot afford to remain idle, they may be willing to work for much lower earnings than before, and this will increase the margin available for paying higher wages to plasterers. These four conditions are independent, and the effects of the last three are cumulative.

The rise in plasterers’ wages would be checked if it were possible either to avoid the use of plaster, or to get the work done tolerably well and at a moderate price by people outside the plasterers’ trade: the tyranny, which one factor of production of a commodity might in some cases exercise over the other factors through the action of derived demand, is tempered by the principle of substitution
*52.

Again, an increased difficulty in obtaining one of the factors of a finished commodity can often be met by modifying the character of the finished product. Some plasterers’ labour may be indispensable; but people are often in doubt how much plaster work it is worth while to have in their houses, and if there is a rise in its price they will have less of it. The intensity of the satisfaction of which they would be deprived if they had a little less of it, is its marginal utility; the price which they are just willing to pay in order to have it, is the true demand price for plasterers’ work up to the amount which is being used.

So again there is a joint demand for malt and hops in ale. But their proportions can be varied. A higher price can be got for an ale which differs from others only in containing more hops; and this excess price represents the demand for hops
*53.

The relations between plasterers, bricklayers, etc., are representative of much that is both instructive and romantic in the history of alliances and conflicts between trades-unions in allied trades. But the most numerous instances of joint demand are those of the demand for a raw material and the operatives who work it up; as for instance cotton or jute or iron or copper, and those who work up these several materials. Again, the relative prices of different articles of food vary a good deal with the supply of skilled cooks’ labour: thus for instance many kinds of meat and many parts of vegetables which are almost valueless in America, where skilled cooks are rare and expensive, have a good value in France, where the art of cooking is widely diffused.

§ 3. We have already
*54 discussed the way in which the aggregate demand for any commodity is compounded of the demands of the different groups of people who may need it. But we now may extend this notion of
composite demand to requisites of production which are needed by several groups of producers.

Nearly every raw material and nearly every kind of labour is applied in many different branches of industry, and contributes to the production of a great variety of commodities. Each of these commodities has its own direct demand; and from that the derived demand for any of the things used in making it can be found, and the thing is “distributed between its various uses” in the manner which we have already discussed
*55. The various uses are rivals, or competitors with one another; and the corresponding derived demands are
rival or
competitive demands relatively to one another. But in relation to the supply of the product, they co-operate with one another; being “compounded” into the total demand that carries off the supply: in just the same way as the partial demands of several classes of society for a finished commodity are aggregated, or compounded together into the total demand for it
*56.

§ 4. We may now pass to consider the case of
joint products: i.e. of things which cannot easily be produced separately; but are joined in a common origin, and may therefore be said to have a
joint supply, such as beef and hides, or wheat and straw
*57. This case corresponds to that of things which have a joint demand, and it may be discussed almost in the same words, by merely substituting “demand” for “supply,” and
vice versâ. As there is a joint demand for things joined in a common destination: so there is a joint supply of things which have a common origin. The single supply of the common origin is split up into so many derived supplies of the things that proceed from it
*58.

For instance, since the repeal of the Corn Laws much of the wheat consumed in England has been imported, of course without any straw. This has caused a scarcity and a consequent rise in the price of straw, and the farmer who grows wheat looks to the straw for a great part of the value of the crop. The value of straw then is high in countries which import wheat, and low in those which export wheat. In the same way the price of mutton in the wool-producing districts of Australia was at one time very low. The wool was exported, the meat had to be consumed at home; and as there was no great demand for it, the price of the wool had to defray almost the whole of the joint expenses of production of the wool and the meat. Afterwards the low price of meat gave a stimulus to the industries of preserving meat for exportation, and now its price in Australia is higher.

There are very few cases of joint products the cost of production of both of which together is exactly the same as that of one of them alone. So long as any product of a business has a market value, it is almost sure to have devoted to it some special care and expense, which would be diminished, or dispensed with if the demand for that product were to fall very much. Thus, for instance, if straw were valueless, farmers would exert themselves more than they do to make the ear bear as large a proportion as possible to the stalk. Again, the importation of foreign wool has caused English sheep to be adapted by judicious crossing and selection so as to develop heavy weights of good meat at an early age, even at the expense of some deterioration of their wool. It is only when one of two things produced by the same process is valueless, unsaleable, and yet does not involve any expense for its removal, that there is no inducement to attempt to alter its amount; and, it is only in these exceptional cases that we have no means of assigning its separate supply price to each of the joint products. For when it is possible to modify the proportions of these products, we can ascertain what part of the whole expense of the process of production would be saved, by so modifying these proportions as slightly to diminish the amount of one of the joint products without affecting the amounts of the others. That part of the expense is the expense of production of the marginal element of that product; it is the supply price of which we are in search
*59.

But these are exceptional cases. It more frequently happens that a business, or even an industry finds its advantage in using a good deal of the same plant, technical skill, and business organization for several classes of products. In such cases the cost of anything used for several purposes has to be defrayed by its fruits in all of them: but there is seldom any rule of nature to determine either the relative importance of these uses, or the proportions in which the total cost should be distributed among them: much depends on the changing features of markets
*60.

§ 5. We may pass to the problem of
composite supply which is analogous to that of composite demand. A demand can often be satisfied by any one of several routes, according to the principle of substitution. These various routes are rivals or competitors with one another; and the corresponding supplies of commodities are
rival, or
competitive supplies relatively to one another. But in relation to the demand they co-operate with one another; being “compounded” into the total supply that meets the demand
*61.

If the causes which govern their production are nearly the same, they may for many purposes be treated as one commodity
*62. For instance, beef and mutton may be treated as varieties of one commodity for many purposes; but they must be treated as separate for others, as for instance for those in which the question of the supply of wool enters. Rival things are however often not finished commodities, but factors of production: for instance, there are many rival fibres which are used in making ordinary printing paper. We have just noticed how the fierce action of derived demand for one of several complementary supplies, as
e.g. for the supply of plasterers’ labour, was liable to be moderated, when the demand was met by the competitive supply of a rival thing, which could be substituted for it
*63.

§ 6. All the four chief problems which have been discussed in this chapter have some bearing on the causes that govern the value of almost every commodity: and many of the most important cross connections between the values of different commodities are not obvious at first sight.

Thus when charcoal was generally used in making iron, the price of leather depended in some measure on that of iron; and the tanners petitioned for the exclusion of foreign iron in order that the demand on the part of English iron smelters for oak charcoal might cause the production of English oak to be kept up, and thus prevent oak bark from becoming dear
*64. This instance may serve to remind us of the way in which an excessive demand for a thing may cause its sources of supply to be destroyed, and thus render scarce any joint products that it may have: for the demand for wood on the part of the ironmakers led to a relentless destruction of many forests in England. Again, an excessive demand for lamb was assigned as a cause of the prevailing scarcity of sheep some years ago; while some argued on the contrary that the better the price to be got for spring lamb sold to the rich, the more profitable would be the production of sheep, and the cheaper would mutton be for the people. The fact is that an increase of demand may have opposite effects according as it does or does not act so suddenly as to prevent producers from adapting their action to it.

Again, the development of railways and other means of communication for the benefit of one trade, as for instance wheat growing in some parts of America and silver mining in others, greatly lowers some of the chief expenses of production of nearly every other product of those districts. Again, the prices of soda, and bleaching materials and other products of industries, the chief raw material of which is salt, move up and down relatively to one another with almost every improvement in the various processes which are used in those industries; and every change in those prices affects the prices of many other goods, for the various products of the salt industries are more or less important factors in many branches of manufacture.

Again, cotton and cotton-seed oil are joint products, and the recent fall in the price of cotton is largely due to the improved manufacture and uses of cotton-seed oil: and further, as the history of the cotton famine shows, the price of cotton largely affects that of wool, linen and other things of its own class; while cotton-seed oil is ever opening up new rivalries with things of its own class. Again, many new uses have been found for straw in manufacture; and these inventions are giving value to straw that used to be burnt in the West of America, and tend to hinder the rise in the marginal cost of producing wheat
*65.

56.

Thus, let a factor of production have three uses. Let
d₁d₁‘ be the demand curve for it in its first use. From
N any point on
Oy draw
Np₁ horizontally to cut
d₁d₁‘ in
p₁; then
Np₁ is the amount that is demanded for the first use at price
ON. Produce
Np₁ to
p₂, and further on to
P making
p₁p₂ and
p₂P of such lengths as to represent the amounts of the factor demanded at price
ON for the second and third uses respectively. As
N moves along
Oy let
p₂ trace out the curve
d₂d₂‘ and let
P trace out the curve
DD‘. Thus
d₂d₂‘ would be the demand curve for the factor if it had only its first and second uses.
DD‘ is its demand curve for all three uses. It is immaterial in what order we take the several uses. In the case represented, the demand for the second use begins at a lower price and that for the third use begins at a higher price than does the demand for the first use. (See Mathematical Note XVII.)