Competition, Supply and Demand, Price

Buying and selling has been one of the chief characteristics of economic activity for centuries. Although there has been much talk and some evidence of barter on an international scale, no one has had the temerity to suggest that our internal business should be conducted on a barter basis. Buying and selling are such commonplace activities for everyone that the many economic proc­esses involved in the simple exchange of goods are ignored. Suppose, for example, in the days before the war, a housewife went to her groceryman on Saturday morning and after inquir­ing the price of eggs, bought a dozen at forty-five cents, com­menting that the price was a bit higher than the week before. But why were eggs forty-five cents a dozen and not twenty-five or eighty-five? Why were they higher this week than last? Who or what sets the price of eggs anyway? Economists have devoted no small amount of effort to find the answers to these questions. Perhaps naturally enough the answers vary from age to age, in­dicating that there is no one eternal and universal way in which prices are set. Prices perhaps are determined differently under different economic conditions. Nevertheless there have been those who sought to answer the questions of price determination by presupposing an ideal situation in which economic forces worked perfectly. With such an assumption it was comparatively easy to work out a general formula that would explain prices. Others, motivated by sentiments of justice or benevolence have been con­tent to make assertions as to how prices should be determined. In the historical development of the ideas of price, fanciful no­tions as well as the more realistic ideas of the great economists have a place.

In the days of Thomas Aquinas (1225-1274) conceptions of price could be summarized in one word: just price. Aquinas lived in an age when small units of population were largely self-sufficient. Exchange was little known and competition among producers and sellers almost entirely absent. In the absence of a market for goods there were no "economic" forces to determine price. Therefore, the price of an article could logically be deter­mined only by the amount of labor time which was required to make it. This did not mean that every laborer's time was equal. The social status of the laborer determined his standard of liv­ing, therefore a just price was one which enabled the maker of the goods to maintain his accustomed standard. Economically speaking, the medieval period was comparatively unchanging, consequently such social facts as custom, status, and inheritance were of utmost importance.

Modifications of the just price formula, however, were being made continuously to allow for the practices of the market place. Risk was a consideration which permitted a merchant to add something to the just price. If a merchant bought when the mar­ket was plentiful and sold when goods were scarce some authori­ties believed a higher price was justified since the merchant had performed a useful service in holding the goods until they were badly needed. This, of course, was a remarkable change from the law of Charlemagne which held that no one should sell goods at higher than the legally fixed price either in time of abundance or time of scarcity.