So, a change in demand that causes a change in price can have these different consequences. Depicting it in terms of supply and demand graphs you would have:
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| The diagram shows that there is a shift in the demand curve to the right, indicating that demand has risen at all prices. The supply curve slopes up to the right indicating that there are diminishing returns, so that to increase supply, less efficient more costly production must take place, the amount of socially necessary labour required for production rises, causing the market value to rise, and this now forms the equilibrium point where the supply curve and this new level of demand intersect. |
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| In this chart, the demand curve shifts to the right again, showing that more is demanded at every price. However, there are constant returns to scale, so producers are able to produce more without resorting to less efficient or more costly production. The average socially necessary labour-time required for this production remains the same, so the market value does not change. More is demanded and supplied, and the equilibrium price, therefore, remains the same. |
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| One again the demand curve shifts to the right showing that demand has risen at all prices. But, here the supply curve slopes down to the right, showing that there are increasing returns to scale. As suppliers are able to produce on a larger scale, they obtain economies of scale, or else are able to produce under lower cost conditions. Less social labour-time is required on average to produce this higher level of output, so the market value falls, and this now forms the lower equilibrium point around which the market price moves. |
But, likewise, if the market value of the commodity changes, then this will affect supply and demand. If the price of cotton rises, due to a bad harvest, the demand for cotton will fall, but also the market value of yarn and cotton goods will rise, so the demand for them will fall.
“In other words, the ratio of supply to demand does not explain the market-value, but conversely, the latter rather explains the fluctuations of supply and demand.” (p 192)
For the same commodity, at different times, equilibrium between demand and supply can be established at different prices, and so it is clear that the basis of this price lies outside the interaction of demand and supply.
“For a commodity to be sold at its market-value, i.e., proportionally to the necessary social labour contained in it, the total quantity of social labour used in producing the total mass of this commodity must correspond to the quantity of the social want for it, i.e., the effective social want. Competition, the fluctuations of market-prices which correspond to the fluctuations of demand and supply, tend continually to reduce to this scale the total quantity of labour devoted to each kind of commodity.” (p 192)
In other words, this is the means by which the Law of Value operates in a market economy, where available social labour-time is allocated to meet social wants through the movement of market prices. This is in contrast to all previous modes of production, as described by Marx, in which the Law of Value operates to allocate available social labour-time on the basis of direct human relations. For example, the primitive commune decides directly how much labour-time to devote to each type of activity to maximise its utility, the peasant producer allocates their labour-time both to meet their own needs, and in express agreements with others to meet each others needs.
“The proportion of supply and demand recapitulates, first, the relation of use-value to exchange-value, of commodity to money, and of buyer to seller; and, second, that of producer to consumer, although both of them may be represented by third parties, the merchants.” (p 192)
Demand is a function of use value. In other words, of individual consumer preferences. I demand 10 units of X whereas you only demand 5 units, despite the fact the price is the same for both of us, because for me, X has a higher use-value, it provides me with more utility. This is no different than in a non-market economy where peasant A devotes 10% of their available labour-time to producing potatoes, whilst peasant B only devotes 5% of their available labour-time, because for A, potatoes have twice as much use value.
The Law of Value determines that in whatever mode of production, this trade off between use value, how much utility is obtained, and value, how much labour-time must be expended to obtain it, will ultimately regulate production decisions, and in what proportions total social labour-time will be allocated. Engels makes this point in Anti-Duhring, in respect of the operation of the Law of Value under Communism.
“The useful effects of the various articles of consumption, compared with one another and with the quantities of labour required for their production, will in the end determine the plan.”
And,
“As long ago as 1844 I stated that the above-mentioned balancing of useful effects and expenditure of labour on making decisions concerning production was all that would be left, in a communist society, of the politico-economic concept of value. (Deutsch-Französische Jahrbücher, p. 95) The scientific justification for this statement, however, as can be seen, was made possible only by Marx's Capital.”
The form this takes under capitalism is billions of these individual decisions, in the market, whose aggregate provides the total of supply and demand.
“In the case of supply and demand, however, the supply is equal to the sum of sellers, or producers, of a certain kind of commodity, and the demand equals the sum of buyers or consumers (both productive and individual) of the same kind of commodity. The sums react on one another as units, as aggregate forces. The individual counts here only as part of a social force, as an atom of the mass, and it is in this form that competition brings out the social character of production and consumption.” (p 193)
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