Capital III, Chapter 10 - Part 17

In reality, supply and demand never do balance, but go through continual fluctuations,whereby one exceeds the other. Only considered over a period so that these continual fluctuations can be averaged out, so that they cancel each other, can any kind of balance be identified. Yet, for the purpose of analysis, this balance has to be assumed, precisely in order to understand the underlying relations unaffected by these fluctuations.

“And this average is not merely of theoretical, but also of practical importance to capital, whose investment is calculated on the fluctuations and compensations of a more or less fixed period.” (p 190)

In fact, there are a multitude of variations as both market price and market value are modified, and as demand affects price and supply, supply affects price and demand, and price affects both demand and supply!

“For instance, if the demand, and consequently the market-price, fall, capital may be withdrawn, thus causing supply to shrink. It may also be that the market-value itself shrinks and balances with the market-price as a result of inventions which reduce the necessary labour-time. Conversely, if the demand increases, and consequently the market-price rises above the market-value, this may lead to too much capital flowing into this line of production and production may swell to such an extent that the market-price will even fall below the market-value. Or, it may lead to a price increase, which cuts the demand. In some lines of production it may also bring about a rise in the market-value itself for a shorter or longer period, with a portion of the desired products having to be produced under worse conditions during this period.” (p 190)

On the one hand, supply and demand determine the market price, but this can't be divorced from the market value, which acts as its locus, and yet, at the same time, that market price and the market value, which stands behind it, determines supply and demand. That is obvious in relation to demand. If the price falls, demand increases, and vice versa. But, its also true for supply. As shown earlier, if the price rises, this will tend to encourage additional supply, because it means above average profits can be made. But, the level of supply itself is a result of a whole series of prices, which determine the cost of production.

If the price of cotton rises, the cost of production for spinners increases. They will no longer be prepared to supply the same quantity of yarn at the old price, because if they did, this would mean they would be making below average profits.

“To this confusion — determining prices through demand and supply, and, at the same time, determining supply and demand through prices — must be added that demand determines supply, just as supply determines demand, and production determines the market, as well as the market determines production.” (p 191)

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