A Study of Man, Economy and State with Power and Market
by Murray N. Rothbard

Man, Economy, And State: A Treatise On Economic Principles

Power and Market: Government and the Economy

Read the Scholars’ Edition which combines both books at mises.org in pdf or html format: http://mises.org/rothbard/mes.asp

I began reading this book before, but after reading Ethics of Liberty and Libertarian Manifesto, I am eager to read this all the way through now. This edition is a combination of what used to be two books: Man, Economy and State and Power and Market, because originally they were supposed to be one combined work.

The dedication to “Power and Market“: to “Libertarians of the Past who Blazed the Trail and to Libertarians of the Future, who Shall Overcome“.

Man, Economy and State: A Treatise on Economic Principles

My comments will include quotations and notes to help me understand the economic ideas better, and to emphasize some points that are important to understand about freedom.

Introduction to Man, Economy and State with Power and Market by Joseph Stromberg

Stromberg describes Rothbard’s work as possessing “… uncompromising consistency and radicalism in pursuing the logic of human action in the economic realm”. I just want to note that these virtues will appeal to those who will move the libertarian movement forward in Canada.

Quote from Rothbard on p. xxviii that Rothbard would apply Mises’ “methodological principles, which demonstrate that historical facts cannot “prove” any theory; the theory must be used as an explanation of historical facts.”

P. xxxv, xxxvi shows how Rothbard transitioned to a conclusion about ethics during the planning of his book. “I have come to believe that there can be a science of rational ethics based on human nature and what is good for human nature.”

On p. xxxviii, he is quoted in a letter as saying,

“Mises, despite his bitter criticism (and correct ones) against the positivists, has accepted a crucial point of their position – that values are only subjective and a matter of taste or “emotion” that cannot be decided on rational grounds. What I have done is go back to the “classical” ethical position that, aiming as we must at individual man’s happiness, there is a “science” of ethics, which can formulate the rules for such “virtuous” action.”

On p. xl, he is quoted criticizing the philosophical view that human beings are constantly in a state of dissatisfaction until they are in some kind of idealized inactive rest. He says,

Such a philosophic view is contrary to the natural state of man, which is at its happiest precisely when it is engaged in productive activity. This revised part eliminates the philosophic pessimism from praxeology.

Noted that the direct effect of government intervention was to prevent people from doing what they would like.

p. lxxxviii

Rothbard on Mises’s Human Action infers his own point of view:

It is economics made whole, based on the methodology of praxeology … and grounded in the ineluctable and fundamental axiom that human beings exist, and that they act in the world, using means to achieve their most valued goals.

Preface to Revised Edition

p. xcvii – Rothbard describes the three Austrian Economics paradigms. He subscribes to the Misesian paradigm of praxeological “action” and “choice”.

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Fundamentals of Human Action [p. 1 – Ch. 1]

Human action is purposeful behavior.

“Only individuals have ends and can act to attain them.”

“groups have no independent existence aside from the actions of their individual members.” True of governments and other groups. And this is a good point to remember about political parties too. Groups define the relationship among individuals. In a marginal note, he emphasizes that he does not at all assume that individuals are like atoms, uninfluenced by others.

[p.12] “Economic is by no means equivalent to material.” Services that people want can be immaterial.

Human action, purpose = end, desire = motive

Humans act

means, technological ideas

time is scarce, a means, all means are scarce

choosing which ends shall be satisfied by employment of means, ranking, economizing, scale of value, scale of preferences, uncertainty of the future – speculations – judgment, error

means to satisfy man’s wants are goods, either directly serviceable = consumers’ goods/goods of the first order OR indirectly serviceable = producers’ goods/factors of production/good of higher order

structure of production occurs in stages – higher to lower

produced factors of production (Capital Goods) vs. original factors of production (Labor and Land)

recipe = plan, an unlimited factor of production

[p. 13] Time

period of production

labor energy (working time) + maturing time

p. 15

Man prefers his end to be achieved in the shortest possible time.

Time preference.

i.e. End achieved ASAP – as soon as possible.

Period of production
Duration of serviceableness

Period of provision

p. 18

value judgement
preferences

p.19
Values of preference/happiness can only be ranked, not measured. Ordinal numbers rather than cardinal
“All action is an attempt to exchange a less satisfactory state of affairs for a more satisfactory one.”

net gain, net loss
“the process of imputing values to goods takes place in the opposite direction to that of the process of production”
Imputing value to particular goods “in accordance with their expected ability to contribute toward serving the various ends”
The source of value

The Law of Marginal Utility

Value Paradox
“How can men value bread less than platinum?”
It should be phrased in units rather than classes
A loaf of bread is less valuable to him than an ounce of platinum

Supply of a good – available in specific homogeneous units equally capable of rendering the same service to the actor

“action uses scarce means to satisfy the most urgent of the not yet satisfied wants”

“the relation between the unit to be acquired or given up and the quanity of supply (stock) already available to the actor”

p. 25
The first unit will be used to supply more urgent wants and the second unit will supply less urgent wants and is therefore less valuable

“for all human actions, as the quantity of the supply (stock) of a good increases, the utility (value) of each additional unit decreases”

utility of X units is greater than the utility of X-1 units
When giving up one unit, the actor gives up the “least urgent of the wants which the larger stock would have satisfied”.

If the supply of something is not scarce, then it is “not a good, but a general condition of human welfare”. One less unit makes no difference in that case (e.g. air). A good (a means) on the other hand is subject to the economizing of human action.

the utility of each successive unit “is less as the quantity of the supply increases”

p. 26 Q. I notice that the assumption is that 6 units represents 6 ends. Is the assumption ok?

The past doesn’t matter to the actor in terms of the ends he wishes to achieve

The one unit that the actor is considering giving up is the marginal unit, or the “unit at the margin“
He has to give up the least important end fulfilled by the stock, which is the satisfaction provided by the marginal unit, or the marginal satisfaction, or marginal utility

The marginal utility of the supply is the end that must be given up as the result of the loss of the unit

Supply of 4 units -> giving up one unit -> then the value of the marginal utility (value of the marginal unit) would have a rank of four, the value of the 4th ranking end

Q. Again, why is the ranking of the ends the same as the number of units? Is this assumption ok? Try to find an explanation for this.

“The greater the supply of a good, the lower the marginal utility; the smaller the supply, the higher the marginal utility”

Fundamental law of economics derived from the axiom of human action: The law of marginal utility (or the law of diminishing marginal utility)

In other words, the more units you have, the least important is the end that you are giving up when you give up one unit. With a smaller supply, the end you are giving up by giving up one unit ranks higher.

Same with adding one unit – marginal unit – its value is the same as the value of the next ranking end, e.g. adding 6th horse to supply of 5 horses is the value of the 6th ranking end – whatever end can be added to the higher ranking ends already served

p.33

“the marginal product is the product foregone by a loss of the marginal unit”. Value “determined either by its marginal product in the next stage of production, or if it is a consumers’ good, by the utility of the end it satisfies”

“value assigned to a unit of a factor of production” = value of its marginal product = its marginal productivity

strives for maximum product at each stage

p.34

law of returns: with the quantity of complementary factors held constant, there always exists some optimum amount of the varying factor

a of factor X + b of Y +c of Z yields p of product P
b & c unchanged, a varies. The value of a yielding the maximum p/a, the max avg return of product to the facto, is the *optimum* amount of X
p/a = avg unit product, p/a declines as a decreases or increases from the optimum
p/a, p/b, p/c – each must have some optimum/maximum value

p/a increases with a until it reaches the optimum point for the varying factor
marginal product (delta a / delta p) = increase in total product provided by the marginal unit

At any given supply of a (units of factor X), a loss of one unit will entail a loss of total product provided by the marginal unit

Often the marginal product reaches its peak before the avg product

As the average product increases (increasing returns), the marginal product is greater than the average product. As the average product declines (diminish returns), the marginal product is less than the avg product. When the avg product is at a maximum, it equals the marginal product.

7. Factors of Production: Convertibility and Valuation

The less specific a factor is, the more convertible it is from one use to another. Wood and iron are convertible to different consumers’ goods.

If there was suddenly no demand for cigars, cigar machines (specific) would become valueless. Cigarettes produced instead. If no demand for tobacco at all, then land for growing tobacco (more non-specific) could be changed to growing cotton.

A change in the value of the product causes a greater change in the value of the specific factors than in that of the relatively nonspecific factors.

2 factors completely specific -> e.g. two shoes in one pair. If lose one shoe, the other factor (shoe) becomes valueless.

8. Factors of Production: Labor versus Leisure

Everyone tries to maximize his production of consumers’ goods per unit of time.

nature-given factors
capital goods
expenditure of labor

Leisure is a desirable consumers’ good
(proposition not deduced from the action axiom)
The more labor, the less leisure
Labor-satisfaction is a good, therefore its marginal utility declines with an increase in its quantity.

Leisure (amount of time spent abstaining from labor – p. 47 indicates this includes sleep) is also subject to the law of marginal utility – decreases as the supply increases.

Those activities engaged in purely for their own sake are play (one of the forms leisure may take)

9. The Formation of Capital

To increase production, produce capital goods. To do this, necessary to restrict consumption (e.g. leisure) = saving and transfer labor and land to production of capital good (= investment) rather than consumer good. Sacrificing present good to acquire consumers’ goods in the future.

Disutility of waiting is balanced against the utility potentially gained by the capital good and longer period of production.

The role of capital (factors of production) is to advance men in time toward their objective in producing consumers’ goods.

satisfaction of wants is consumption

saving involves the restriction of consumption compared to the amount that could be consumed, does not always involve an actual reduction in the amount consumed.

All capital goods are perishable. Those few products that are not are for all intents and purposes part of the land

Each capital good has a useful life and a depreciation or rate of being used up

Any actor has the choice of a) adding to his capital structure, b) maintaining his capital intact, or c) consuming his capital. Saving is necessary for both a) and b).
Repair or replacement.

Once the disutility of waiting – utility of present consumers’ goods foregone – becomes greater than the utility of obtaining more goods in the future through saving, the actor will cease to save

p. 59. Capital goods have no independent productive power of their own – completely reducible to labor and land which produced them, and time

p. 61 –
Along with time preference, an uncertainty factor affects decision to make an investment – either to the advantage or disadvantage of the investment

present value of the future good

rate of time preference

higher rate of discount -> the lower the present value of the future good -> more likely to make the investment

He will cease saving and investing at the point at which the value of goods foregone exceeds the present value of the future utilities to be derived. This will determine an actor’s rate of saving and investing at any time.

the act of entrepreneurship – guessing situation of uncertainty

accumulated stock of capital goods imposes a conservative force on present-day action

existence of capital good not in use reveals a past error, but indicates that the actor expects to acquire a greater utility from other uses of his labor

present goods / future goods
Saving goods for later -> they become capital goods until they are used -> then they’re consumers’ goods

10. Action as an Exchange

Action involves choice, exchange of one state for what might be a more satisfactory one

Man must always act, even “doing nothing”

attaining a value higher than what he is giving up: making a psychic profit

what he is giving up may be called his costs

maximize his psychic income or psychic revenue, ie. attain the greatest height on his value scale

Appendix A

praxeological analysis – deal with any given ends and means – rules of logic determine economic truths that follow from the action axiom

Not the same as ethics or psychology, which deal with the content of human ends

Each unit of the supply of a good has to be equally serviceable

• why: psychology;
• what ends should be: ethics, aesthetics;
• how to use means to arrive at ends: technology;
• what and how: history;
• formal implication of using means to achieve ends: praxeology

catallactics = analysis of interpersonal exchange

praxeology outside of economics (subdivision) is less explored

defends use of verbal logic rather than symbolic logic. Fine but I wonder if anyone has tried to convert Austrian economics into symbolic logic

Appendix B – On Means and Ends

ends (e.g. money) can become means to other ends – but there is a logical distinction between ends and means

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Ch. 2 – Direct Exchange

1. Types of Interpersonal Action: Violence

Action to achieve ends using violence: murder, expropriation.
Or threat of violence, intimidation.

Factors that might induce person to refrain from violence:
(1) feels it’s immoral and higher on his value scale to refrain from violence than advantages
(2) establishes unwelcome precedent where he might become victim himself later
(3) costs of war and weapons may outweigh spoils
(4) he may gain spoils but loses services that his enemy could have provided to him
He estimates disutility of long-run consequences of violence
But if he has high time preference, this may not dissuade him
If he doesn’t take consequences into account, his actions may be erroneous and he will not maximize his revenue

Slavery is another form of violent action
Slave chooses between going along or being faced with violence
compulsory labor
The slave is not enthusiastic, he does not believe that revolt will better his condition.

p.82 – marginal note – voluntary lifelong service can’t guarantee that he will not change his mind and leave his service – a man’s person and will are inalienable, i.e. cannot be given up to someone else for any future period.

slave always worse off than in a voluntary arrangement

Hegemonic relationship. command and obey. used as factors of production. “slave” “serf” “ward’ “subject”

Results of this violent interaction are of different types. One result is continuing hegemonic bond.

Any continuing pattern of interpersonal exchanges is called a society

No reality to a society apart from the individuals who compose it and their actions

Two categories of exchange
(1) Autistic. No interpersonal action.
(2) Interpersonal exchange.

Exploitation. Ruler exploits the subject for the ruler’s benefit. Subject has no choice.

2. Types of Interpersonal Action: Voluntary Exchange and the Contractual Society

society based purely on voluntary action

laws of the unhampered market
voluntary interpersonal exchange

A gives up a good to B in exchange for a good that B gives up to A
Both people make the exchange because they expect it will benefit them; otherwise they would not have agreed to the exchange
Conditions of exchange:

A values X more than Y, and B values Y more than X. Goods valued in reverse order
Each party knows of the existence of the other and his goods

Either present or future goods / claims to future goods

A and B will exchange one unit of X and Y if: to A, marginal unit of addition of Y is greater than marginal unit of X and if to B, marginal unit of addition of X is greater than marginal unit of Y

A and B will exchange units of X for units of Y – the law of marginal utility applying – until one of them reaches a point where further exchange would lead to a loss

assets (stock of goods)

goods have: direct-use value and exchange value – goods can be used to exchange for other goods of greater usefulness to the actor

Goods exchanged as long as they have greater exchange value than use value

Producing for a market rather than themselves, for the exchange value.

“Empirically we know that the exchange economy has made possible an enormous increase in productivity and satisfactions for all the participants”

I wonder if this can be demonstrated logically?

A good’s use-value can be zero for its owner but its exchange-value can high. Both can vary.

The greater the supply, the less value each unit would be in direct-use and more likely to exchange (exchange-value increases)

A decrease in supply increases likelihood that direct-use value will predominate

Network of voluntary interpersonal exchanges = society; also forms a pattern of interrelations known as the market.

Unhampered market, free market

p. 91

• contractual society
• exchange-contracts
• relationships are symmetrical
• full power to make ones’ own decisions

societies: totally hegemonic, or totally contractual or various mixtures of the two (ie. mixed economies)

property

exclusive control

not sure he’s completely right about air being scarce in terms of ownership.

• (1) each has ownership over his own self, will and actions, and the manner in which he will exert his labor
• (2) acquires scarce nature-given factors

p.93

self-ownership, appropriation of unused nature-given factors, production of capital and consumers’ goods. Then comes giving and exchanging.

Marginal note about children sounds undeveloped, and I think he developed the idea better in his later works. My interpretation: children develop self-ownership more and more, not complete self-ownership at birth as they don’t have the ability to reason, their parents have authority over them, but not in the same way as over property. Don’t have the right to aggress against the child. Guardians. Walter Block has an essay where he develops the idea of neglect. Again, my interpretation: In that case, the parents are not fulfilling their role as guardians and in effect are making the child available to other guardians. Just some brief comments on this huge topic. Important topic because there needs to be a system that allows families to be free from state intrusion, but allows for protection of children from abuse. A libertarian society – could probably do the latter more effectively than what exists now (which is pitiful) because the emphasis in a libertarian system of justice on the victim and on individual rights – and because of the freedom people would have to use adoption services. But we cannot tolerate state regimentation of society and interference with family life.

free market does not allow violent or invasive expropriation of property

hegemonic regimes can’t abolish property, they can only transfer it from the producers or natural self-owners to another set of people

Types of Human Action

I. Isolation (Autistic Exchange)
II. Interpersonal Action
A. Invasive Action

• War
• Murder, Assault
• Robberty
• Slavery

B. Noninvasive Action

• Gifts
• Voluntary Exchange

p. 95 – 3. Exchange and the Division of Labor

Reasons for specialization

Exchange implies division of labor. Extent of the market for the products determines the exchange-value of goods.

The fact of exchange and division of labor implies that it is more productive for all concerned. Empirically results can be seen.

Enormous variety and diversity in human beings – abilities, skills, tastes, locations

Exchange will occur where each party has a superiority in productivity in regard to one of the goods exchanged

devoting working time to good at which he excels => total productivity for each product increases

Exchange may beneficially take place even when one party is superior in both lines of production:
Law of association, the law of comparative costs, law of comparative advantage

as more and more people linked together in exchange network, the more extended is the market for each product, the more exchange-value predominates in the decisions of each producer

genuinely cooperative society

each specializes in a task – produces for exchange, benefits others and himself

mutually beneficial exchanges – peaceful society => great scope for social sympathy and friendships

benefits restrain would-be aggressors

p. 104 – 4. Terms of Exchange

There is actually a double inequality of values when an exchange is made. The good A is getting is worth more to him than what he is giving up to B. B’s values are reversed.

rate of exchange

price of one commodity in terms of another is the price

A sold 1000 berries and bought 2 cows in exchange

B sold 2 cows and bought 1000 berries in exchange
Sale is the good given up, Purchase is the good received

Psychic revenue he expects to receive in the exchange is greater than the psychic costs
Psychic costs = next best use he could have made of the resources given up in the exchange

Conditions for exchange to take place:
marginal utility (mu) of the good received must be > mu of goods given up
AND
for specific exchange:
mu of goods received must be > mu foregone (what could have been received in another type of exchange)

Seller always prefers the highest possible selling price
Buyer will always purchase his good at the lowest possible price
If he pays more for a good from a different source because of the source, this is explained because these are different goods in kind and can’t be compared that way

p. 106 – 5. Determination of Price: Equilibrium Price

In order for an exchange to be made, the min. selling price of the seller must be lower than the max buying price of the buyer

Bidding. Price high enough to exclude “less capable” or “less urgent” buyer.

price established somewhere at or below max buying price of most capable buyer and above max buying price of next most capabley buyer

One seller, multiple buyers. Addition of more buyers greatly narrows the bargaining zone. Narrows in an upward direction to the advantage of the seller. e.g. bid up to 100 barrels of fish for horse.

many sellers and one buyer is converse. Price will be set at the min selling price of the 2nd most capable and that of the most capable competitor. e.g. bidding down to 1/100 horse for a barrel

p. 114

Amount offered for sale at each price is the supply.

Amount demanded for purchase at each price is the demand.

• As long as the demand exceeds the supply at any price, buyers will continue to overbid and the price will continue to rise.
• When the price is so high that supply exceeds demand, underbidding of suppliers will drive the price downward.

Price of the good will find a resting point where the quanity demanded = quantity supplied, ie. where supply equals demand. At this price only, the market is cleared, i.e. no incentive to bid up or down, equilibrium price.

p. 116

At equilibrium price, e.g. 89 units for 5 items, sales will be made to the 5 most capable buyers – X1-X5. Less urgent buyers excluded from the market.
The 5 most capable sellers (charge the lowest) – Z1-Z5 – make the sale at this price.

The marginal seller Z5 is the one who just makes the equilibrium price. Would be excluded if a slight drop in price.
The marginal buyer X5 is the one who would be excluded by a slight rise in price.

The other sellers will not sell for less thant he marginal seller. The other buyers will not pay more than the marginal buyer.

The supramarginal (including the marginal) buyers and sellers obtain a psychic gain/surplus from their exchange (which can’t be compared between individuals). Those excluded from the market are submarginal.

At the equilibrium price alone, all those buyers and sellers who are willing to make exchanges can do so.
At any other price there are either frustrated buyers or frustrated sellers.

At a price of 84, 8 people would like to buy, but only 2 horses available. A lot of unsatisfied or Excess demand – shortage. At 95, 7 sellers but only 3 buyers. Excess supply – surplus.

Price below equilibrium creates shortage of supply for demanders.
Price above equilibrium creates surplus of goods for sale as compared to demands for purchase.

Market process tends to eliminate shortages and surplus and establish a price where demanders can find a supply and suppliers a demand.

Case where seller appears to set prices, e.g. retail:

• Price set too low -> buyers will rush to make purchases, shortages develop, eager buyers for unavailable goods. So sellers realize they can obtain higher prices.
• Prices set too high -> surpluses of unsold stock, have to lower price to move unwanted stock

Case where buyer appears to set prices:

• quotes below equilibrium -> cannot satisfy all their demands -> have to raise price
• quotes too high -> stampede of sellers with unsalable stocks and will lower price and clear market

all buyers and sellers will tend to exchange at the same price as their marginal competitors

Tendency to have one and only one price

arbitrage gains – buying and selling to take advantage of discrepancies (created by sellers or buyers that don’t know the equilibrium price) – these act quickly to establish one price

market prices will only tend to change when changing supply and demand conditions establish a condition of excess supply or excess demand

Supply and demand curve

Price on the vertical axis and quantity on the horizontal access

As price increases, new suppliers w. higher min buying prices brought in to the market while demanders with low max buying prices begin to drop out
*As price decreases, quantity demanded must always either remain the same or increase – demand curve is either vertical or rightward sloping. Demand schedule Like this:
*As price decreases, supply must always decrease or remain the same – supply curve is either vertical or leftward sloping. Supply schedule Like this: /

Equilibrium price is where the two curves intersect. Buyers and sellers at the margin. Determines price and quantity exchanged

Each seller with multiple horses (each equivalent) has his own supply schedule. Minimum selling price is higher for each successive item sold as per the law of marginal utility. 1st horse has a lower price, 2nd horse is a higher price because it’s of more value, etc.
So, again, the supply cannot decrease at higher prices, but must increase or remain the same

For the market, add together the supply of horses available at each price from all sellers
Market-supply schedule in the case of one seller with 4 horses is the same as if there were 4 sellers each supplying one horse, each with a different minimum selling price

Converse in the case of demand. For buyer, the marginal utility of first horse will be more than the second horse, each additional horse will be worth less to him, and each barrel of fish given up will be worth more, so his maximum buying price will decrease with each purchase.

Individual demand schedules for each buyer can be added together to form a resultant demand curve for all buyers on the market

Demand curve – demand must either increase or remain unchanged as the price decreases

Total stock of the good available (horses) puts a maximum limit on the amount that can be supplied
Conversely, the total stock of the purchasing good (barrels of fish) puts a maximum limit on the total of the sale good an individual or the market can demand

Equilibrium quantity – what is exchanged at the equilibrium price – quantities of both goods

6. Elasticity of Demand

total outlay of the sale good offered on the market at a particular price
Outlay = Price X Quantity Demanded (of purchase good)

e.g. at price 80 barrels, demanded: 9 horses, total outlay of sale good: 720 barrels

Total Outlay Curve
Logical derivation from the demand curve. As Price decreases, total outlay increases and decreases but overall it increases
Vertical axis is Price (barrels / horse)
Horizontal axis is Outlay (barrels)

Total Outlay Curve can slope in either direction as price increases or decreases

A decrease in price means demand either increases or remains the same, therefore decrease in price tends to be counteracted by an increase in quantity, and therefore the total outlay may either increase or decrease as the price changes

total # of units of the sale good that will be expended at each price

3 horses demanded at price of 95 barrels, then 3×95= 285 barrels is number of units of the sale good offered in exchange

This is total outlay of the sale good at that price

a decrease in price tends to be counteracted by an increase in quantity, so total outlay may either increase or decrease as the price changes

For any two prices, compare total outlay of the sale good that will be expended by buyers:

• ****

  If lower price yields a greater total outlay than the higher price, the total outlay curve is ELASTIC over that range. – elasticity greater than unity

• ****

  If lower price yields a lower total outlay than the higher price, the curve is INELASTIC over that range – elasticity less than unity

• ***

  if total outlay same for both prices – unit elasticity or elasticity equal to one (neutral)

*Simple geometric rule: if outlay curve further to the right at the lower price, the demand curve is elastic. Further to the let, curve is inelastic.

*Any two prices on the schedule may be compared. The demand curve in example is basically elastic over most of its range with a few gaps.

Outlay is less at the higher price (widely spaced prices). If price is high enough, demand for a good will dwindle to zero, and therefore outlay will dwindle to zero.

****Of interest: elasticity of the demand curve at the equilibrium price – in the neighbourhood of the equilibrium price – above and below. This could be elastic or inelastic.

“elasticity of supply” is not a meaningful concept like “elasticity of demand”

*quantity supplied* at each price X price = # barrels sellers demand in exchange

The problem is that this quantity ALWAYS increases as the price increases and vice versa
because its other determinant, quantity supplied, changes in the same direction as the price
Therefore supply is always “elastic”, uninteresting concept.

“elasticity of demand” -> determinant is “quantity demanded” is in the inverse direction to price

marginal note criticizes the origin of the importance attached to this including use of calculus and “elasticity at a point”

7. Speculation and Supply and Demand Schedules

An individual will demand a good if the marginal utility of adding a unit of the purchase good is greater than the m.u. of the sale good that he must give up. Another individual will be a seller if his valuation of the units are in reverse order

*market demand curve will never decrease when price is lowered and a supply curve will never increase when price increases

*Supply Curve / Demand Curve

direct-use value and exchange value – whichever is higher

Demand curve for direct use by consumers
Figure 18

The approach to equilibrium takes place through actual purchases at the various prices, and then the shortages/surpluses reveal the overbidding/underbidding until equilibrium reached

To the extent that buyers foresee the final equilibrium price, they will not buy at a higher price but will wait for the price to fall. Similiarly if the price is below equilibrium in their judgment, they will tend to buy some of the good in order to resell at a profit at the final price.

So demand curve changes – becomes far more elastic (more bought at lower price and less at higher ) – when exchange value and anticipating final price enters the picture.

Supply curve changes also. Sellers will anticpate equilibrium price and refuse to make sales at lower prices.
They will sell more above the equilibrium price – sell horses above equilibrium and buy them back at equilibrium price to make profit.

Erroneous expectations for equilibrium price, e.g. lower than final price leads to demand curve that intersects at lower equilibrium price, but only provisional – shortages will develop and demanders overbid until price is raised to genuine equilibrium price. Same process of revelation of error applies to suppliers. When shortages or surpluses develop at the price they anticipated, their actions tend once again to establish equilibrium.

Purchaser Revenue – marginal utility of the added horse for the buyer (highest of direct use or exchange value)
Cost – marginal utility of the fish given up (highest of direct use or exchange value)

He will buy the horse if expected revenue is greater than cost. If expected cost is greater he will not buy.

Seller:
Also tries to obtain a revenue higher than the psychic cost, cost = utility of next best alternative he would have to forego in taking his action
Seller weighs marginal utility of added sale good (fish) against marginal utility of the purchase-good given up (horse)
Sells if expected revenue is greater than cost

It is utility and utility alone that determines the price and quantity exchanged, that determines the supply and demand schedules. “Cost” is simply the utility of the next best alternative that must be foregone in any action, and is therefore part and parcel of the individual’s value scale

Consideration of revenue and cost in any action is based on the present value of expected future revenues and costs (even if it’s immediate future)

Utilities derived and utilities foregone in any action refer to some points in the future, and hence past costs play no role in human action and hence in determining price

8. Stock and Total Demand to Hold

p. 150

Effect of an increase in stock is to lower equilibrium price

Effect of an increase in the supply schedule is to lower equilibrium price

p. 152

S(t) = S(t-n) + P(n) – U(n)
S = stock

P = production of good over period n

U = amount of good used up

An “increase in demand” = increase in the demand schedule. This needs to be distinguised from an increase in the quantity demanded along the same schedule as a result of an increase in the supply offered.

p. 153

10. Specialization and Production of Stock

specialization

p. 154

market supply schedule
market demand schedule
The further specialization proceeds, the less possible use-value the product can have for its producer

p. 158

Comes to this conclusion: “if we abstract from the speculative elements in the market, therefore, the sole determinant of the market price of the stock of a good is its relative direct use-value to its purchasers

(not sure how he arrived at this)

entrepreneurship

Buyer and Seller Revenues and Costs
Revenue for both the buyers and sellers is the expected direct use of the goods acquired; the costs are the exchange for a third good that is foregone because of this exchange.

11. Types of Exchangeable Goods

p. 162

commodities and services treated the same
Economics not a science that deals particularly with “material goods” or “material welfare” – action of men to satisfy their desires

p. 164
inalienable property – cannot permanently transfer his will. cannot be compelled to continue an arrangement whereby he submits his will to another
e.g. marriage contract – can’t be compelled to continue if he/she no longer has the desire to do so
Exchanges may occur with alienable goods

p. 165
Claims:
*warehouse receipt, claim on present good, goods-substitute
*share – evidence of part-ownership, can also be used in exchange
*credit exchange, unfinished payment, claim on a future good, creditor can exchange it, e.g. 100 lbs of cotton now in exchange for a claim of 110 lbs of cotton 1 year from now
time preference
closer to the present is more valuable
closer to maturity – claim more valuable, and how secure the debt is – more valuable

(Original Post – Ch. 1, Ch. 2)