Book IV, Chapter VI: The Individual Determinants of Price

In the chapter before last we saw that price is determined at a level fixed by the valuations of the marginal pairs. We have still to ask, What are the circumstances which determine whether this level itself is high or low?

The first few steps in the answer are very easy. It is clear at a glance that the two things which must have the decisive influence on the position of the marginal pairs are the number and the intensity of the desires or valuations on both sides. In this way. The level of the valuation of the marginal pairs will tend to be high when, on the side of the buyers, there are very high valuations, and, relatively, a great many of them, and when, on the side of the sellers, the low valuations are relatively few. For, in this case, the few low valuations of the sellers will be cancelled by a portion of the more numerous high valuations of the buyers, and since, after this is done, there are still buyers with a high valuation, while at the same time the only remaining sellers also have a high valuation, the marginal pairs on both sides are composed of persons with high valuations. On quite analogous grounds the level of the valuation of the marginal pairs will tend to be low when, on the side of the buyers, there are (relatively) few high valuations, and on the side of the sellers there are (relatively) many low valuations.

If we single out the individual factors from the combined action of which, as we have shown, the valuation level of the marginal pairs results, we get the following individual determinants of price: —

The latter, however, is not a simple matter. The figures in which valuations are expressed are in no wise simple expressions of the absolute amount of subjective value which the commodity has for the valuer. They only express a relation obtained by comparing two different valuations—that of the commodity and that of the equivalent price. When we said in our scheme that A values a horse at £30, that is not to say or prove anything of the absolute importance of a horse to A's wellbeing; all that it expresses is the relation in which the value of the horse to A stands to the value of the money to A. It simply says that A values the horse thirty times more highly than he values one pound sterling. If, therefore, we wish—and this is the task in which we are at present engaged—to lay down the elementary factors in the formation of price, we must put down, instead of the combined amounts which make up the figures of our valuation, the elements out of which they are combined. These elements are two—first, the absolute amount of subjective value which the commodity has for the valuer; and second, the absolute amount of the subjective value which the unit of the equivalent price has for the valuer. And, indeed, they obviously work towards combination in this sense, that the figures are high in direct ratio to the absolute value of the commodity, and in inverse ratio to that of the equivalent, and vice versâ.

Thus, in our scheme of the determinants of price, instead of the valuation figures, we have to lay down as the determinants of these figures—

Continuing our enumeration we have—

As in the former case, this latter determinant may be split up into two simpler factors—

These two find their own further determination according to the law of marginal utility. But frequently this leads to a very noteworthy peculiarity. In the present condition of industry most sales are made by men who are producers and merchants by profession, and who hold an amount of their commodities entirely beyond any needs of their own. Consequently, for them the subjective use-value of their own wares is, for the most part, very nearly nil; and the figure which they put on their valuation (in which the subjective use-value is the standard element) also sinks almost to zero. Finally comes the result that, in such sales, the limiting effect which, according to our theoretical formula, would be exerted by the valuation of the last seller, practically does not come into play, and price is actually limited and determined by the valuations of the buyers alone. In other words: when goods are once produced, and the owner can do nothing with them for his own personal wants, they must, all the same, seek a market. To find this market the seller must, in the usual way, put his goods at a price low enough to find buyers for the whole stock he offers for sale. In the case of a stock of 1000 pieces, for instance, he will find his market at a price which is somewhat less than the valuation of the thousandth buyer, and somewhat higher than the valuation of the thousand and first. If, now, the relations of production and sale are normal, the whole stock offered will, almost invariably, be taken off by the demand at a price which is far above the minimum use-value of the commodity to the sellers, and which, beyond the full amount of costs, brings them a business profit. If the circumstances, however, are unfavourable, it may well happen that the seller must seek for his market at considerably lower levels of demand, and be content to take prices which show a loss when compared with costs of production. But, as a rule, even those forced prices are still above the subjective use-value of the commodity to the seller, and the function of this subjective use-value, as lower limit of price, does not come into operation. It is only if the price should sink almost to zero that it would be checked in its descent by this latter limit, the valuation of the seller, finally coming into play. But it can scarcely ever come to this: in almost all cases the competition of buyers is sufficient of itself to stop the downward movement at a higher point on the scale. Thus, in regard to the prices actually established within a large and organised market, the law of price undergoes a great simplification. Of the four valuations which, as "valuations of the two marginal pairs," limit the zone within which price is determined, the valuations of the seller, for the reasons mentioned above, fall out altogether. But, if the buyers are very numerous, the interval between the figures which two successive buyers put on their valuation is so small, that the zone limited by the figure of the last buyer and that of the first unsuccessful competitor, is narrowed almost to a point. And so far as this is the case it may be asserted, with sufficient exactness, of the economic exchange which goes on in large markets, that the market price is determined by the Valuation of the Last Buyer.