Theories of Surplus Value, Part II, Chapter 12 - Part 24

Marx now examines the situation where the additional supply results in a lower market price, which in turn causes an increase in demand. If the price drops to £1.846 per ton, demand rises to 292.5 tons, which means that all of the supply is absorbed.

Table C

Class	C Capital £'s	T Output Tons	TV Total Value £'s	MV Market-Value £'s Per Ton	IV Individual Value £'s per Ton	DV Differential Value £'s per Ton	CP Cost-Price (price of production) £'s per ton	AR Absolute Rent £'s	DR Differential Rent £'s	AR in T Absolute Rent in Tons	DR in T Differential Rent in Tons	TR Total Rent £'s	TR in T Total Rent in Tons
I	100	60	110.769	1.846	2.000	- 0.153	1.833	0.769	0	0.416	0	0.769	0.416
II	100	65	120.000	1.846	1.846	0	1.692	10	0	5.416	0	10	5.416
III	100	75	138.461	1.846	1.600	0.246	1.466	10	18.461	5.416	10	28.461	15.416
IV	100	92.5	170.769	1.846	1.297	0.548	1.189	10	50.769	5.416	27.50	60.769	32.916
Total	400	292.5	540.000					30.769	69.230	16.666	37.50	100	54.166

Table D

Class	C Capital £'s	T Output Tons	TV Total Value £'s	MV Market-Value £'s Per Ton	IV Individual Value £'s per Ton	DV Differential Value £'s per Ton	CP Cost-Price (price of production) £'s per ton	AR Absolute Rent £'s	DR Differential Rent £'s	AR in T Absolute Rent in Tons	DR in T Differential Rent in Tons	TR Total Rent £'s	TR in T Total Rent in Tons
I	100	60	110	1.833	2.000	- 0.166	1.833	0.	0	0	0	0	0.
II	100	65	119.166	1.833	1.846	- 0.012	1.692	9.166	0	5.000	0	9.166	5
III	100	75	137.500	1.833	1.600	0.219	1.466	10	17.500	5.454	9.545	27.500	15
IV	100	92.5	169.583	1.833	1.297	0.540	1.189	10	49.583	5.454	27.045	59.583	32.50
Total	400	292.5	536.250					29.166	67.083	15.909	36.590	96.25	52.50

Unlike Table C, Table D shows the situation where the 292.5 tons of supply is only fully absorbed if the market price falls to £1.80 per ton. In other words, in Tables C and D, Marx is examining the situation arising from different degrees of price elasticity of demand. The slope of the demand curve in D is different to that in C, illustrating a greater elasticity of demand in C to D.

At this price of £1.80 per ton, it equals the price of production for land type I. It can make the average profit of 10%, but pays no rent. Ricardo has this case as being normal, but, on the assumption that the progression has been from the most fertile to least fertile lands, as opposed to here, where land type IV came into production last.

Land I produces 60 tons. At £2 per ton, the demand is 200 tons. If II – IV only produced 140 tons, all of the 200 tons would be absorbed by the demand, and I would determine the market value. But, that is not the case, as II – IV's production leads to an oversupply of 92.5 tons. The oversupply then causes the market price to fall. It depends then on the price elasticity of demand how much the price needs to fall in order to raise demand from 200 tons to 292.5 tons. If demand is infinitely inelastic, it will not rise above 200 tons, no matter how much the price falls.

“If this were, in fact, surplus production, which exceeded the absolute requirements of the market, then I would be completely thrown out of the market and II would have to withdraw half its capital as in B II would then determine the market-value as in B.” (p 292)

At this point, the total supply would fall to 200 tons, but would still require the remaining output from II to achieve it, so II would then determine the market value. However, as Table D suggests, the consequence of the oversupply is that market prices fall, and demand rises in response to the lower market price. In this case, it rises to absorb the whole 292.5 tons, when the price falls to £1.80 per ton. Starting from the initial position where demand is 200 tons, and the supply 292.5 tons, II would try to hold on to its market share by selling at its individual value of £1.846. But, even at that price, supply would exceed demand. Producers on land type III and IV would try to hold on to their market share, by similarly selling at even lower prices.

However, when the market price has been driven down to £1.80 per ton, demand has risen to 192.5 tons, absorbing all the supply. So, all producers can dispose of their output, and at this price, land I would be selling below its individual value, but still at its individual price of production. It could pay no rent, but would still make the average profit of 10% on its capital. This situation is rather like what has been seen with oil production and prices in recent years. It illustrates Marx's examples whereby the progress is both from the most fertile to least fertile, and simultaneously from the least fertile to more fertile. In other words, a lot of oil production came from the very fertile oil fields of the Middle East. As demand exceeded supply, and global oil prices rose, new, less fertile fields were opened up, for example, in the North Sea, Alaska and Siberia etc. As demand rose further, new technologies, such as fracking, were developed, which meant that new oil production, in the US, could be opened up, which was less fertile than the Middle Eastern production, but more fertile than the North Sea production etc.

As a result of the increase in output, a condition of oversupply, similar to that set out by Marx here, in Table D, was created. The market prices fell, and caused a rise in demand. But, rather than the least fertile production dictating the market value, it becomes, under such conditions, the most fertile production that determines the market value.

“If this reduction in price is so great that the classes I, II etc. have to sell below their costs of production, they naturally have to withdraw [their capital from production]. If, however, the situation is such that the reduction does not have to be so great in order to bring the output into line with the state of the market, then the total capital can continue to work in this sphere of production at this new market-value. 

But it is further clear that in these circumstances it is not the worst land, I and II, but the best, III and IV, which determines the market-value, and so also the rent on the best sorts of land determines those on the worse, as Storch correctly grasped in relation to this case.” (p 292-3) 

If the price rose above £1.80 per ton, the market would contract, there would be oversupply, and the more efficient producers would reduce their selling price, to dispose of all their output. A similar thing occurs now with the oil market, except that the situation there is that if the price rises, its possible for shale oil producers to quickly restart rigs and increase output, so that supply rises, and market prices fall back. Its why I suggested, back in 2014, that, after a sharp drop in oil prices, caused by oversupply, the price would remain in a range between $40-70, during 2016, as this process of production being turned on and off, in response to price moves occurred. Only when either global oil demand rises sufficiently – shift in the demand curve – or when less productive oil production is taken out – North Sea etc. - are prices likely to escape that price range, and establish a new longer term equilibrium price around $70-80 a barrel. Given the rapid moves to replace petrol engined cars with electric powered cars, I now expect that we will never again see $100 a barrel oil, in constant money prices, and it may even be hard now for prices to even rise above $70 a barrel.

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