Question

"We might as reasonably dispute whether it is the upper or the under blade of a pair of scissors that cuts a piece of paper, as whether value is governed by utility or cost of production. It is true that when one blade is held still, and the cutting is effected by moving the other, we may say with careless brevity that the cutting is done by the second; but the statement is not strictly accurate, and is to be excused only so long as it claims to be merely a popular and not a strictly scientific account of what happens." - Alfred Marshall, Principles of Economics

What do you understand from this quote, with regard to the role of the market forces of supply (cost of production), demand (utility) and price (value) in the market?

Answer 1

Solution:

• Price of a consumer good is not solely determined by either supply or demand but it is determined by the interaction of both law of supply and law of demand.
• We might falsely assume that the price of a good is determined by either supply or demand alone when one of the two forces is held constant. But this assumption would be unscientific.
• Law of supply sates that higher the price of the good the producer will be more willing to supply the good. This is because a higher price would increase the revenue of the producer and would justify the additional cost of manufacturing an additional unit of that good.
• Law of demand states that higher the price of a good the consumer would be less willing to purchase the good.This is because higher the price of a good higher will be his opportunity cost of purchasing that good in terms forgone consumption of other goods and utility.
• These two laws act in opposite direction. That is supply has a positive relationship with price and demand has an inverse or negative relationship with price. However interaction between these opposite forces in the market determines the equilibrium price or value of a good. This phenomenon is quite similar to the interaction of two blades of a scissors moving in opposite directions helping to cut a piece of paper.