Such are the broad outlines of the general theory of equilibrium of normal demand and supply. But there remain many important details to be considered; the first of which is concerned with the relations between the different factors that are required to co-operate for the production of the same goods, and with those between the joint products of the same branch of production.'

economic causes, then the income that is derived from capital in these forms enters into the payments by which the expenses of production of the commodity in question have to be covered, and it directly controls the action of the producers who are on the margin of doubt as to whether to increase the means of production or not. But, on the other hand, when we are considering the causes which determine normal prices for a period which is short relatively to that required for largely increasing the supply of those appliances for production, then their influence on value is chiefly indirect and more or less similar to that exerted by the free gifts of nature. The shorter the period which we are considering, and the slower the process of production of those appliances, the less part will variations in the income derived from them play in checking or increasing the supply of the commodity produced by them, and in raising or lowering its supply price; and the more nearly true will it be that, for the period under discussion, the Net income to be derived from them is to be regarded as a Producer's Surplus or Quasi-rent. And thus in passing from the free gifts of nature through the more permanent improvements in the soil, to less permanent improvements, to farm and factory buildings, to steam-engines, &c., and finally to the less durable and less slowly made implements, we find a continuous series.

1 This chapter is much abbreviated from Principles V. v.; several minor difficulties, chiefly of an abstract character, being here ignored.

CHAPTER VI.

JOINT AND COMPOSITE DEMAND: JOINT AND COMPOSITE

Derived de

SUPPLY.

§ 1. THE demand for the things used for making other things, and their factors of production, is inmand and joint direct; it is DERIVED from the demand for the demand. things towards the production of which they contribute; or, in other words, the demands for all the various factors of production of a finished commodity are joined together in the JOINT DEMAND for it. Thus the demand for beer is direct, and is a joint demand for hops, malt, brewers' labour, and the other factors of production of beer: and the demand for any one of them is an indirect demand derived from that for beer. Again there is a direct demand for new houses; and from this there arises 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. But the demand for any one of these, as for instance the labour of plasterers, is only an indirect, or Derived, demand.

Illustration taken from a labour dispute in the building trade.

Let us take an illustration from a class of events that are of frequent occurrence in the labour market; and 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 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 supply schedules 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. Thus the demand price for new houses will now exceed the sum of the supply prices of these other factors by a good margin; and that margin gives the limit to the possible rise of the demand price for plasterers' labour, on the supposition that plasterers' labour is indispensable'.

§ 2. It is however 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 by 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.

We may note the general conditions, under which a check

1 The different amounts of this margin, corresponding to different checks to the supply of plasterers' labour, are determined by the general rule that,— The demand price for any thing used in producing a commodity is, for each separate amount of 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.

This and several other results of the present chapter can be most clearly apprehended by the aid of diagrams. See Principles V. VI,

to the supply of a thing that is wanted not for direct use, but as a factor of production, may cause a very great rise in its price.

Conditions

under which a check to

supply may

raise much the

The first condition is that the factor itself should be essential, or price of a factor nearly essential to the production of the comof production. modity, 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.

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 plasterers' 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.

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; for that will increase the margin available for paying a high price for this one. 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.

influence of

Substitution.

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 mode- Moderating rate price by people outside the plasterers' trade. the Law of The Law of Substitution here as elsewhere exercises a subduing influence on forces which might otherwise lead to startling results. The tyranny which one factor of production of a commodity might in some cases exercise over the other factors through the Law of Derived Demand is tempered by the Law of Substitution.

The relations between plasterers, bricklayers, &c. 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' noticed how the demand for any commodity is made up or compounded of the Composite demands of the different individuals who may demand. need it. But we now may extend this notion of coMPOSITE DEMAND to factors of production. 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; and the total demand for it is the sum of the derived demands for it, in each of these several

uses.

1 See Book III. Ch. III., IV.